Result

• IJM Plantation posted a headline net loss of RM5.1m and revenue of RM183.1m for 1QFY19. After stripping out loss in foreign exchange, gain in financial derivatives instrument and foreign exchange losses on foreign borrowings, we derived a core net profit of RM7.9m, which tumbled 65.8% qoq and 59% yoy. The unfavourable qoq and yoy performance was dented by lower FFB production in Malaysia Operation (MO) amid lower average selling prices (ASP) in Crude Palm Kernel (CPO) and Palm Kernel (PKO).
• Below expectations. The 3MFY18 core net profit of RM7.9m only matched 8.1% and 10.8% of our and consensus full year net earnings forecast respectively given lower-than-expected margin.

Comment

• QoQ performance bogged down by lower margins in Malaysia Operation (MO) and Indonesia Operation (IO) despite higher FFB production in IO. Revenue for MO and IO edged up 26.7% qoq and 33.3% qoq respectively underpinned by higher CPO sales in both operation (MO: +69.2% qoq and IO: +32.4% qoq), However, PBT in 1QFY19 dropped by 14.1 ppts due to lower margins achieved in both MO and IO. MO was affected by decline in closing inventory levels (valued at the prevailing lower palm produce prices) 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. Besides, MO’s FFB production decreased 32% qoq while IO’s FFB production increase +36.3% qoq amid lower CPO and PKO prices [MO: CPO:- 3% qoq, PKO:-21% qoq][IO: CPO:-0.5% qoq].

• Higher operating cost in IO and lower revenue weighed on YoY operational performance. Revenue and PBT dropped 0.8% yoy and 261.3% yoy respectively in 1QFY19. Lower PBT was aggravated by higher operating cost in IO with PBT margin dropped 21.6 ppts to -12.8% while lower revenue was due to lower CPO and PKO prices in MO and IO [MO:-13% yoy and -19.6% yoy respectively][IO:-15.5% yoy and -14.9% yoy respectively]. However, IO’s FFB production increased 3.3% yoy whilst MO’s FFB production tumbled 22.3% yoy.

• Looking forward, the group’s performance will be affected by prevailing soft CPO prices, higher maintenance and overhead costs as well as volatility in foreign exchange. Nevertheless, we expect FFB production growth to accelerate with increase in young mature areas in IO. On the other hands, we expect production cost to remain elevated as its young age tree profiles require higher fixed plantation maintenance, coupled with higher overhead costs in relation to start-up crop yield. Therefore, overall performance of the group shall be tepid amid rising FFB production.

Earnings Outlook/Revision

• We cut our earnings forecast for FY19 and FY20 in by 24% and 23.4% respectively in view of the higher fixed cost and lower margins.

Valuation & Recommendation

• Downgrade to SELL from HOLD with lower target price of RM2.00 (RM2.20 previously) following earnings cut. Our valuation is now pegged at 21x FY20F 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 - 29 Aug 2018