IJM Plant’s 1HFY19 core net profit of RM3.8m (-87.7% yoy) came in below our and consensus expectations. The decline in earnings was mainly due to lower CPO and PKO ASPs as well as higher operating costs, but was partially offset by slightly higher CPO sales volumes. As such, we cut our FY19-21E core EPS forecasts by 13-73% to account for the weak results and lower our TP to RM1.44 (from RM1.51 previously). Maintain SELL rating on the stock.

1HFY19 Results Below Expectations

IJM Plantations (IJMP) reported lower 1HFY19 revenue by 15.2% yoy to RM323.2m, mainly because of lower CPO and PKO ASPs but partially offset by slightly higher CPO sales volumes. Revenue from both Malaysia and Indonesia declined by 17.4% and 12.6% yoy, to RM169.8m and RM153.4m respectively. 1HFY19 CPO ASPs for Malaysia and Indonesia were at RM2,326/MT (1HFY18: RM2,718/MT) and RM1,998/MT (1HFY18: RM2,470/MT), respectively, while PKO ASPs for Malaysia and Indonesia were at RM3,526/MT (1HFY18: RM4,543/MT) and RM3,265/MT (1HFY18: 4,318/MT), respectively. The EBITDA margin contracted to 19%, down 10.5ppt yoy, partly attributable to lower CPO and PKO ASPs as well as higher operating costs. IJMP reported a LBT of RM58m in 1HFY19 vs. a PBT of RM29.5m in 1HFY18. After excluding one-off items, IJMP’s core net profit in 1HFY19 declined by 87.7% yoy to RM3.8m. This came in below our and consensus expectations, accounting for 11% and 6% of our previous FY19 and the street’s forecasts, respectively. The variance to our forecast was mainly due to the weaker-than-expected EBITDA margin.

2QFY19 Core Net Loss of RM6.6m

IJMP’s 2QFY19 revenue declined by 23.5% qoq to RM140.1m and the company reported a wider LBT of RM31.7m (2QFY18 LBT: RM26.3m), mainly due to lower CPO ASPs and sales volumes. After excluding one-off items, IJMP reported a core net loss of RM6.6m vs. a core net profit of RM10.4m in 1QFY19.

Maintain SELL rating with lower TP of RM1.44

We have cut our FY19-21E core EPS forecasts by 13-73% mainly to account for the weaker-than-expected 9M18 results. Based on our revised earnings forecasts, we roll forward our valuation horizon to FY20E (from CY19E as we think investors should look beyond IJMP’s exceptionally weak FY19E earnings), and using an unchanged 23x PER, we revise our Target Price for IJMP to RM1.44 from RM1.51. We expect earnings to improve in FY20-21E underpinned by better CPO ASPs and production. Nevertheless, given the downside of 19% to our TP, we maintain our SELL rating on the stock.

Key Risks

Key upside risks include: 1) stronger economic growth leading to a higher/lower consumption of vegetable oils; 2) a sustained rebound in the CPO price; 3) higher-than-expected FFB and CPO production; and 4) changes in policies.

Source: Affin Hwang Research - 27 Nov 2018