Result.

• IJM Plantation posted a headline net profit and revenue of RM 16.9m and RM184.6m respectively for 1QFY18. After stripping out losses in foreign exchange and gains in financial derivatives instrument, we derived a core net profit of RM16.7m, which edged up 10.8% qoq and 8.9% yoy. The performance was underpinned by significant recovery in FFB production.

• Below expectations. The 3MFY17 core net profit of RM16.7m matched 12.7% and 12.3% of our and consensus full year net earnings forecast respectively given lower-than-expected margin under Malaysia operation.

Comment

• Lower margin trimmed performance in 1QFY18 despite higher FFB production. Both Malaysia operation (MO) and Indonesia operation (IO) posted a higher FFB production (+31.7% qoq and +15.3% qoq) in 1QFY18 but suffered lower selling prices for both Palm Kernel (-33.5% qoq and -41% qoq respectively) and CPO price (-10.5% qoq and -10.3% qoq respectively). As such, revenue for Malaysia operation and Indonesia operation edged down 1.5% qoq and 7.3% qoq respectively. Nevertheless, 1QFY18 PBT for both MO and IO plunged 20% qoq and 51.1% qoq respectively as a result of lower margins achieved. MO was affected by higher phasing related plantation maintenance costs. Meanwhile, IO was bogged down by production cost pressures from the increase in young mature areas incurring full fixed plantation maintenance and overhead costs set against start-up crop yields.

• Replanting cost (Malaysia Operation) and full fixed plantation maintenance cost (Indonesia Operation) tapered 1QFY18 performance on a yearly basis despite higher revenue. Both Malaysia and Indonesia operation recorded higher revenue (+38.1% yoy and 26.1% yoy) as a result of higher FFB production (+3.8% yoy and +54.3% yoy) coupled with higher CPO price (+7.1% yoy and 3.8% yoy) that outweighed a dipped in Palm Kernel price (-11.2% yoy and – 5.5% yoy). However, PBT dropped 17.8% for MO and 57.4% for IO in view of the low margins.

• Looking forward, the group’s performance is underpinned by growth in Indonesia operation as well as sustainability in Malaysia operation. However, the overall growth would be mitigated by fixed plantation maintenance and overhead costs in Indonesia operation. We believe Indonesia will sustain its growth in FFB production given more young trees advance into mature bracket. On the other hands, we expect production cost to remain high as its young age tree profiles require higher fixed plantation maintenance, coupled with higher overhead costs in relation to start-up crop yield. In a nutshell, overall performance of the group shall be tepid amid rising FFB production.

Earnings Outlook/Revision

• We cut our earnings forecast for FY18 and FY19 in by 13.5% to 15 % in view of the higher fixed cost.

Valuation & Recommendation

• Downgrade to SELL with a lower target price of RM2.50 (Previously was RM3.00) following our earnings cut. We pegged our valuation at PER of 20x FY18F EPS given its relatively young average tree age of 9.2 years (Malaysia area 14.2 years and Indonesia 4.9 years). Whilst we are positive with the Group’s prospects over a longer run given its strong growth in Indonesia, we do not foresee any immediate positive kicker to the share price with lingering cost issue.

Source: JF Apex Securities Research - 24 Aug 2017