Result

• IJM Plantation recorded a headline net profit of RM8.1m and revenue of RM142.9m in 3QFY19.

After stripping out gain in foreign exchange, gain in financial derivatives instrument and foreign exchange losses on foreign borrowings, we derived a core net loss of RM15.6m, widening from net loss of RM5.8m in last quarter and net profit of RM17m a year ago.

• QoQ performance was dented by lower Crude Palm Kernel (CPO) in both Malaysia Operation (MO) and Indonesia Operation (IO) amid slower FFB production in Indonesia Operation (IO). Meanwhile, YoY was eroded by lower Crude Palm Kernel (CPO) and Palm Kernel (PKO) in both Malaysia Operation (MO) and Indonesia Operation (IO).

• Below expectations. 9MFY19 registered a core net loss of RM13.4m, which was substantially below ours and market expectations’ net profit of RM48.8m and RM5.2m respectively given higher-than-expected interest cost and forex losses albeit lower commodity prices.

Comment

• Narrowing Loss Before Tax (LBT) qoq was underpinned by forex gain amid higher revenue. IJMP’s revenue in 3QFY19 up 2.0% qoq, thanks to higher FFB production in MO despite lower FFB production in IO coupled with slower CPO and PKO prices in MO and IO. [FFB production, MO: +77.2% qoq; IO: -9.8% qoq] [CPO price, MO: -13.5% qoq; IO: -9.3% PKO price: -17.7% qoq; IO: +0.2% qoq]. Besides, LBT was narrowed to RM2m (from LBT of RM31.8m) due to forex gain amounting RM28.6m. As such, PBT margin increased by 21.3 ppts in 3QFY19.
• YoY performance was bogged down by higher operating cost despite stellar FFB production in both MO and IO. The Group’s revenue tumbled 36.5% yoy, no thanks to lower CPO and PKO prices in both MO and IO. [CKO price: MO: -26%; IO: -29.6%] [PKO price: MO: -46.4%; IO: -44.1%]. However, FFB production in both MO and IO increased by +9.9% and +21.9% respectively. Besides, the Group’s recorded a LBT of RM2m which plunged 12.3%/ - 23.5 ppts due to higher operating cost in MO.
• Cumulatively, 9MFY19 revenue deteriorated 23.1% yoy and registered a LBT of RM57.3m (vs 9MFY18’s PBT: RM67.8m), tumbling 184.5% yoy. The Group’s revenue stumbled due to lower FFB production in MO coupled with higher CPO & PKO prices in MO and IO [FFB production, MO: -8.3% yoy, IO: +13.3% yoy; CPO price: MO: -17.6% yoy, IO: -23.2% yoy; PKO price: MO: -34.1% yoy, IO: -32.5% yoy]. Meanwhile, LBT was further weighed down by higher forex loss on USD against Rupiah in addition to production cost pressure arising from increased young mature area.
• Looking forward, the group’s performance will be affected by prevailing soft CPO price, higher maintenance and overhead costs as well as volatility in foreign exchange. On the other hand, we expect production cost to remain high as its young age tree profiles require higher fixed plantation maintenance, and 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 from core net profit of RM48.3 to core net loss of RM6.3m while FY20F from core net profit of RM63.1m to profit of RM34.4m to account for soft CPO price outlook, higher fixed cost and hence lower margins. We also would like to take this opportunity to introduce FY21F earnings amounting RM49.4m.

Valuation & Recommendation

• Downgrade to SELL from HOLD with a lower target price of RM1.20 (RM1.50 previously) as we rolled over our valuation to FY21F. Our valuation is now pegged at 21x FY21F 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 negative view on the stock is premised on its steep valuation and the lingering cost issue.

Source: JF Apex Securities Research - 27 Feb 2019