Result.

IJM Plantation posted a headline net profit and revenue of RM 16.5m and RM224.9m respectively for 3QFY18. After stripping out gains in foreign exchange, losses in financial derivatives instrument and foreign exchange losses on foreign borrowings, we derived a core net profit of RM17m, which was down by 18.5% qoq and 57.9% yoy. The tepid yoy and qoq performance was due to higher tax expenses as well as higher amortization and interest expense.

Below expectations. The 9MFY18 core net profit of RM54.6m meets 68.7% and 58.8% of our and consensus full year net earnings forecast respectively given higher than-expected operating costs incurred.

Comment

3QFY18 operational performance supported by higher FFB production on a qoq basis. Revenue and PBT in 3QFY18 lifted up to 14.5% and 77.9% respectively. The stellar QoQ performance was mainly contributed by Malaysia Operation (MO) despite losses in Indonesia Operation (IO). Better MO performance was backed by higher FFB production (+34% qoq) which outweighed a slight decrease in CPO price (-2.8 qoq). Meanwhile, losses in IO were impacted by plantation maintenance and overheads in view of additional mature areas.

Higher FFB production in MO boosted 3QFY18 performance on a yoy basis. Revenue and PBT climbed 2.1% yoy and 12.3% yoy respectively in 3QFY18. Revenue growth was mainly driven by IO that backed by higher FFB production (+11.5% yoy) which outweighed the lower CPO prices (-8.2%). Meanwhile, PBT in 3QFY18 was lifted as a result of higher revenue and lower unrealised foreign exchange loss despite higher maintenance and overheads costs.

Cumulatively, 9MFY18 revenue was up 8% yoy but PBT plunged 42.7% yoy. Higher revenue was mainly lifted by IO with FFB production up 27.3% yoy against a drop in MO of 9.4% yoy. However, 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 by 13.1% while retain FY19F in view of the higher-than expected interest cost and depreciation & amortisation expenses.

Valuation & Recommendation

Upgraded to HOLD from SELL with an unchanged target price of RM2.50 as share price dives below our fair value. 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). Our neutral stance on the stock is due to its steep valuation and the lingering cost issue.

Source: JF Apex Securities Research - 28 Feb 2018