Result

• IJM Plantation registered a headline net loss of RM27.4m and revenue of RM140.1m for 2QFY19. After stripping out loss in foreign exchange, gain in financial derivatives instrument and foreign exchange losses on foreign borrowings, we derived a core net loss of RM5.8m, which contracted 173% qoq and 127.7% yoy.
• The uninspiring qoq and yoy performances were due to lower FFB production in Malaysia Operation (MO) coupled with lower average selling prices (ASP) in Crude Palm Kernel (CPO) and Palm Kernel (PKO) in both Malaysia Operation (MO) and Indonesia Operation (IO).
• Below expectations. The 6MFY19 core net profit of RM2.1m only matched 2.8% and 3.5% of our and consensus full year net earnings forecast respectively given higher-than-expected interest cost and forex losses.

Comment

• 2QFY19 QoQ performance dented by lower CPO and PKO prices in both MO and IO despite higher FFB production in IO. The Group posted a lower revenue and higher loss before tax in 2QFY19 due to sluggish performance in MO and IO. Revenue for MO and IO tumbled 31.2% qoq and 14.2% qoq respectively dented by lower FFB production in MO coupled with lower CPO & PKO prices in MO and IO despite higher FFB production in IO [FFB production:- MO:-4.5% qoq, IO:+8.2% qoq ; CPO price: MO:-7.0% qoq, IO:-11.7% qoq ; PKO price: MO:-0.7% qoq, IO:-14.5% qoq]. Besides, loss before tax in 2QFY19 expanded from RM26.3m in 1QFY19 to RM31.7m, no thanks to higher forex loss that compressed Group’s margin.

• Higher operating cost in MO and IO as well as lower revenue eroded 2QFY19 yearly performance. The Group’s revenue dropped 28.7% yoy due to depleted growth in MO and IO (MO: -33.3% yoy, IO: -23.5% yoy). Lower revenue in MO was dented by lower FFB production and CPO & PKO prices (FFB production: - 16.9% yoy, CPO prices: -17% yoy, PKO price: -24.5% yoy) while slumbering IO’s revenue due to lower CPO & PKO prices (CPO prices: -23.4% yoy, PKO price: -31.4% yoy). Similarly, the group registered a loss before tax in this quarter, plunging 339.5% yoy due to higher forex loss as well as higher production cost in MO and IO.
• Cumulatively, 6MFY19 revenue slumped 15.2% yoy and remarked a loss before tax of RM55.3m (vs 6MFY18’s profit before tax: RM35m), tumbling 257.7% yoy. Lower revenue was dented by lower FFB production in MO, lower CPO & PKO price in MO and IO despite higher FFB production in IO [FFB production, MO: -19.7% yoy, IO: +9.7% yoy; CPO price: MO: -14.4% yoy, IO: -19.1% yoy; PKO price: MO: -22.4% yoy, IO: - 24.4% yoy]. Meanwhile, loss before tax was further bogged down by higher forex loss on USD against Rupiah coupled with production cost pressure arising from increased young mature area.
• Looking forward, the group’s performance will be affected by prevailing soft CPO price outlook, higher maintenance and overhead costs as well as volatility in foreign exchange. 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. Therefore, overall performance of the group shall be tepid for the rest of the year.

Earnings Outlook/Revision

• We cut our earnings forecast for FY19F and FY20F in by 35.6% and 25.7% respectively to account for soft CPO price outlook, higher fixed cost and lower margins.

Valuation & Recommendation

• Maintained SELL with a lower target price of RM1.50 (RM2.00 previously) following our earnings cut. Our valuation is pegged at 21x FY20F PE given its relatively young average tree age of 9.2 years (Malaysia area is 14.2 years and Indonesia is 4.9 years). Our neutral stance on the stock is premised on its steep valuation and the lingering cost issue.

Source: JF Apex Securities Research - 27 Nov 2018