Focus on Improving Production and Costs

In our recent strategy report, we had cut our FY19-21E earnings for IJMP to take into account lower production growth, slower decline in production costs as well as higher effective tax rate assumption. However, we are yet to price in a minimum wage hike increase proposed under the Pakatan Harapan’s manifesto. We maintain our HOLD rating and 12-month TP of RM2.05, based on an unchanged 22x PER applied to our CY19E core EPS.

Improving Yield and Matured Acreage to Increase Production

IJMP’s Indonesia FFB yield in FY18 amounted to 15 MT/ha, lower than Malaysia’s FFB yield at 20.8 MT/ha, partly attributable to the younger palmtrees in the Indonesian estates as compared to Malaysia. We believe FFB production will continue to grow in FY19-21E as the lag effect of 2015/16 El Nino is eliminated, improvement in yield as well an increase in matured acreage, but we have cut our FFB growth production assumption to 3-9% from 2-15% previously, due to lower production at its Indonesian estates.

Healthy Demand to Support CPO Prices

Prices of most vegetable oils have been under pressure with improvement in global production, including palm-oil. Our CPO ASPs forecast for IJMP is at RM2,450-2,500/MT over FY19-21E from RM2,532/MT in FY18.

Revision on Production Costs and Tax Rate Assumption

Although FFB production has improved, IJMP continues to be affected by the low start-up yields while incurring full plantation maintenance costs and overheads. We expect the group’s production costs to decline from c. RM1,700/MT in FY18 to RM1,650/MT by FY21E. However, this is provided there is no minimum wage hike. Roughly, for every RM100 increase in minimum wage, costs would rise by about RM4.5m per year or cut our FY19 EPS by about 6%. Also, IJMP has guided for a higher effected tax rate for the group due to derecognition of certain deferred tax assets, the tax treatment of the forex movements and non-deductibility of certain expenses for tax purposes at the overseas subsidiaries. Hence, we had raised our tax rate assumption for FY19-21E to 30% from 24% previously.

Maintain HOLD Rating and TP of RM2.05

We had cut our FY19-21E earnings by 25-27%, in the recent strategy report, mainly to factor in lower production growth, slower decline in production costs as well as higher effective tax rate assumption. In tandem with earnings cut, our TP for IJMP was lowered to RM2.05, based on an unchanged 22x PER applied to our CY19E core EPS.

Source: Affin Hwang Research - 3 Jul 2018