IJM Plantations posted a core net loss of RM9.1m in 6MFY20 vs. a core net profit of RM3.8m in 6MFY19, mainly due to weaker CPO and PK ASPs. Nevertheless, we expect IJMP to return to the black in 2HFY20, underpinned by stronger CPO prices. We revise our FY20- 22E core EPS by 18-23%, mainly to account for higher CPO price assumptions, partially offset by higher production costs. We believe the anticipation of a stronger demand growth rate for palm-oil products as compared to the production growth rate has helped to boost CPO prices. Given our earnings forecast revisions, we raise our DCF-derived TP to RM2.10. Maintain our BUY rating on IJMP.

2QFY20: Narrowing Losses

IJM Plantations’ (IJMP) 2QFY20 revenue increased by 29.9% qoq to RM172.9m, mainly due to higher sales volume of CPO (+38.7% qoq) and PKO (+36.8%). IJMP posted an LBT of RM5m in 2QFY20, narrowing from an LBT of RM5.4m in 1QFY20 – higher losses in the Indonesian operations due to lower CPO and PKO prices in Indonesia, but partially offset by higher profit from Malaysian operations due to better sales volumes and ASPs of CPO and PKO in Malaysia. After excluding one-off items, IJMP’s core net loss narrowed to RM0.4m from an RM8.7m loss in 1QFY20.

Lower Revenue in 6MFY20 Due to Weak CPO Prices

For 6MFY20, IJMP reported a lower revenue of RM305.9m, down by 5.4% yoy, mainly due to a lower contribution from Malaysian operations (lower CPO sales volumes and ASPs) but partially mitigated by the higher contribution from Indonesian operations (higher CPO sales volume but lower CPO ASP). For IJMP, 6MFY20 CPO ASPs for Malaysia and Indonesia stood at RM1,953/MT (6MFY19: RM2,326/MT) and RM1,821/MT (6MFY19: RM1,998/MT), respectively, while PKO ASPs for Malaysia and Indonesia were at RM2,231/MT (6MFY19: RM3,526/MT) and RM2,343/MT (6MFY19: 3,265/MT), respectively. The EBITDA margin contracted to 17.6%, down 1.4ppt yoy, partly attributable to lower CPO and PKO ASPs. IJMP reported an LBT of RM10.3m in 6MFY20 (includes forex gain), narrowing from an LBT of RM58m in 6MFY19 (includes forex loss). After excluding one-off items, IJMP registered a core net loss of RM9.1m in 6MFY20 vs. a core net profit of RM3.8m in 6MFY19.

Raising CPO Price Assumptions

We expect IJMP’s earnings to turn positive in 2HFY20, underpinned by the recovery in CPO prices. We raise our FY20-22E core EPS by 18-23%, mainly to take into account higher CPO price assumptions but partially offset by higher production costs. We forecast IJMP’s CPO price to average at RM2,200-2,650/MT for FY20-22E from RM2,150-2,400/MT previously. We think CPO prices will likely recover on the back of declining global palm-oil stocks, healthy demand for palm-oil products for food and energy industries and a slower global CPO production growth rate.

Target Price Is Now Higher at RM2.10, Maintain BUY Rating on IJMP

Given the earnings forecast revisions, we raise our DCF-derived TP to RM2.10 (from RM1.68 previously). We maintain our BUY rating on IJMP, given a potential 18% upside based on our new TP.

Key Risks

Key downside risks include: 1) weaker economic growth leading to a lower consumption of vegetable oils; 2) a drop in the CPO price; 3) lower-thanexpected FFB and CPO production; and 4) negative changes in policies

Source: Affin Hwang Research - 27 Nov 2019