Despite our neutral stance on CPO prices, we remain comfortable with the long-term prospects of United Malacca (UMCCA) due to its better-than-average FFB growth prospects and low EV/planted hectare (ha.) relative to its peers. However, we expect limited earnings surprise in the near-term due to lower FY15E CPO prices at RM2,200/MT. While major expansion is unlikely for now, dividend payments should be unaffected by lower CPO prices due to its net cash position of RM142.1m or RM0.70 per share. We reiterate our MARKET PERFORM call on UMCCA with an unchanged TP of RM6.68 based on 20.2x Fwd. PER on CY15E EPS of 33.0 sen.

Full upstream planter with over 100 years of planting experience. To recap briefly, UMCCA is a mid-sized planter fully based in Malaysia with a total gross landbank of 24.1k ha (7.2k ha in Peninsular Msia and 16.9k ha landbank in Sabah) with 22.3k ha or 91% of planted area. In terms of maturity, the company has 6.4k ha of immature trees (under 3-years old).

Good long-term growth potential… With a relatively young average tree age profile of 8.5 years (compared to the sector’s average of 10.4 years), we think UMCCA should see higher-than-average FFB growth for the next 2-4 years. Note that peak productivity of oil palm is at 10-12 years old. Furthermore, we observe that UMCCA’s EV/planted ha of RM51.4k implies a 36% discount to sector’s average EV/planted ha of RM81.0k. We think the discount is unjustified as 71% of UMCCA’s planted ha consist of mature trees with a yield of 20.9MT/ha which is comparable to the sector’s average yield of 21.7MT/ha. Hence, we think its long-term value remains intact as >90% of its palm trees are still under 15 years old with additional 852 ha. maturing in FY15E, which should result in better FFB yield going forward.

…But expect no surprises in the near-term. We think that near-term upside arising from better FFB growth is largely offset by waning CPO prices. Our expected FY15E FFB production of 352.6k MT implies +6% FFB growth, matching the sector average of +6%. Despite the decent FFB growth outlook, we think near-term upside could be capped as we expect lower FY15E CPO prices of RM2,200/MT to result in lower FY15E CNP of RM64.3m (-10%).

New expansion unlikely for now. The last major land banking activity by UMCCA was in 2009 when the company acquired about 10k ha in Sabah. Since then no significant land banking activity was reported. While we think it's possible they may venture into Indonesia in the long-term, the current cash reserve is insufficient to acquire a sizable hectarage (assuming a price of RM80k/ha, with RM142m the company could acquire about 1.8k ha which may not be sufficient for sizable planting activity). As UMCCA seems to be a highly conservative company that avoids debt, we think they are less likely to venture into Indonesia for now.

Strong balance sheet to support dividend payouts. We expect FY15EFY16E dividends of 19.0-21.0 sen which translates into decent dividend yield of 3.0-3.3%. This is in line with its peers’ average net dividend yield of 2.9%. We assume a payout ratio of 60% which is slightly conservative compared to its 5-year historical payout ratio range of between 61% and 75%. Despite potentially weaker FY15E earnings, we think that UMCCA should be able to maintain its dividend payout due to its current net cash position of RM142.1m. Note that this translates to net cash of RM0.70 per share which is the highest among its peers.

Reiterate MARKET PERFORM on UMCCA with unchanged TP of RM6.68 based on a PER of 20.2x on CY15E EPS of 33 sen. We like UMCCA for its good FFB growth potential for the next 2-4 years and strong balance sheet with a consistent net cash position for more than 25 years. However, we think that near-term earnings upside is largely neutralised by lower expected CPO prices in FY15E.

Source: Kenanga