Result.

• IJM Plantation posted a headline net profit and revenue of RM 9.4m and RM196.4m respectively for 2QFY18. After stripping out 1.) gains in foreign exchange, 2.) losses in financial derivatives instrument and 3.) foreign exchange losses on foreign borrowings, we derived a core net profit of RM24.3m, which was up 45.5% qoq but down 37.8% yoy. Better qoq performance was due to lower tax expenses. Meanwhile, the weaker yoy performance was bogged down by higher amortization and interest expense.

• Below expectations. The 6MFY18 core net profit of RM37.6m meets 33.6% and 32.4% of our and consensus full year net earnings forecast respectively given higher than-expected interest cost and depreciation and amortisation expenses.

Comment

• 2QFY18 operational performance buoyed by higher palm kernel selling price on a quarterly comparison. 2QFY18 revenue improved 7% qoq but PBT down 19.4 26.4% qoq. Higher revenue was backed by higher palm kernel sales in Indonesia operation. Meanwhile, lower PBT was a result of foreign exchange losses on US denominated borrowings and losses on crude palm oil pricing swaps. However, adjusted PBT for 2QFY18 was up 19.3% qoq, underpinned by higher selling price in palm kernel (+5.8% qoq for Malaysia operation and +6% qoq for IO) which outweighed drop in CPO price.

• Lower FFB production and palm kernel selling price eroded 2QFY18 performance on a yearly comparison. 2QFY18’s revenue dropped 3.4% yoy in view of poor Malaysia operation (MO) which was mitigated by better performance in Indonesia operation (IO) as MO revenue dropped 33.8% yoy and IO revenue surged 108.5% yoy given lower FFB production in MO (weather impact) but higher in IO (more areas came to mature). Meanwhile, adjusted PBT for 2QFY18 dropped 57.3% yoy. The lacklustre performance was a result of higher plantation and replanting costs in MO coupled with higher depreciation and amortisation and interest expenses.

• Cumulatively, 6MFY18’s revenue was up 9.9% yoy but adjusted PBT plunged 40.6% yoy. Higher revenue was mainly lifted by IO with FFB production +55.9% yoy against a drop in MO by 19% yoy. However, adjusted PBT margin was whittled by higher replanting and wage costs in MO coupled with higher depreciation and amortisation, and interest expenses.
• Looking forward, the group’s performance is underpinned by growth in Indonesia operation. However, the overall growth would be mitigated by fixed plantation maintenance and overhead costs in Indonesia operation coupled with higher replanting and wage costs in Malaysia. 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 FY18F and FY19F by 29% and 12.5 % respectively in view of the higher-than-expected interest cost and depreciation & amortisation expenses.

Valuation & Recommendation

• Maintain SELL with an unchanged target price of RM2.50. Our valuation is pegged at 20x FY19F PE given its relatively young average tree age of 9.2 years (Malaysia area 14.2 years and Indonesia 4.9 years). We dislike the stock given its steep valuation and the lingering cost issue.

Source: JF Apex Securities Research - 29 Nov 2017