We are cutting our FY19-21E core EPS for IJMP by 11-41% mainly to take into account our lower FFB and CPO production and higher productioncost assumption. The logistics issue at its East Kalimantan estate has delayed harvesting and if the situation were to persist, there could be major crop losses. Reaffirm SELL with a lower TP of RM1.51.

Delay in Harvesting Due to Logistics Issues at Its Indonesia Estate

IJMP’s oil-palm plantation estate in East Kalimantan, Indonesia, was adversely affected by logistics issues. There were insufficient barges to carry the CPO to the refineries and meanwhile oil storage tanks are full. Hence, there were days that IJMP had to stop harvesting as they were unable to process the FFB. We are lowering our FY19 FFB production assumption for Malaysia to 470k MT (earlier forecast: 500k MT), while our FFB production for Indonesia now falls to 500k MT (earlier forecast: 520k MT).

Production Costs Likely to be Higher in FY19

We assume IJMP’s production costs to be higher in FY19E, mainly due to the Malaysian operations as labor costs increased and production is tracking lower than expected. The minimum wage in Malaysia is set to rise to RM1,050 starting 1 January 2019 from RM1,000 in Peninsular Malaysia and RM920 in East Malaysia. The CPO cost of production for Malaysia in FY19 could potentially climb to RM1,800-1,900/MT from c. RM1,650/MT in FY18, while Indonesian costs of production are likely to stay at RM2,100-2,200/MT.

CPO Prices Expected to Improve in Coming Months

IJMP’s CPO ASP for Malaysia was at c.RM2,325/MT while that for Indonesia was at c.RM2,000/MT in 1H FY19. Prices of most vegetable oils have been under pressure with the improvement in global production, including palm oil, as well as trade tensions between the US and China. Our CPO ASP forecast for IJMP is at RM2,250-2,450/MT for FY19-21E, from RM2,532/MT in FY18.

Reaffirm SELL Rating With a Lower Target Price of RM1.51

We are cutting our FY19-21E earnings by 11-41%, mainly to take into account a lower FFB and CPO production growth rate and our higher production-cost assumption. Given our earnings cuts, which are slightly offset by a higher target PER of 23x (based on the plantation sector average PER; from 22x previously) applied to our CY19E core EPS, we lower our 12-month TP to RM1.51 (from RM1.88) and reaffirm our SELL rating.

Source: Affin Hwang Research - 23 Oct 2018