yearly is >80% focused on Indonesia, (ii) CPO production cost per ton is likely to be flattish due to rising labor cost despite flat fertiliser and logistics costs, and (iii) IJMP may suffer RM9.0m foreign exchange (forex) translation losses although this is typically excluded from Core Net Profit (CNP) calculations. We maintain our FY15E-FY16E CNP estimates of RM158m-RM164m and reiterate our MARKET PERFORM call on IJMPLNT. We like IJMP for its lower tree age profile (7.2 years) vs. peer average (10.4 years). However, the stock may succumb to unfavourable sector dynamics arising from the weak CPO price outlook of RM2,200/MT. Furthermore, we are comfortable with our TP of RM3.30 as we are valuing IJMPLNT at a slight premium of +0.5SD compared to other planters which are valued at average levels.

Key growth area in Indonesia. The main growth driver for IJMPLNT will be in Indonesia where management expects FFB production to more than double within two years from 144k in FY14 to 250k MT-350k MT in FY15E-FY16E. We gather that about 5k-4k hectares (ha) should come into maturity in FY15-FY16, which should increase overall its Indonesian planted area to 35k-39k ha respectively. Based on management estimates, total FFB production in FY15-FY16E should come up to 830k- 930k MT, which is in line with our estimates of 810k-900k MT. Management also highlighted that FFB production from Indonesia is targeted to match production in Malaysia by FY17, while revenue and profit from Indonesia should match that of Malaysia by FY18-FY19 respectively.

However, FFB growth prospects in Malaysia are limited. Despite high growth from Indonesia, overall FY15 FFB growth should be limited to 11% due to flattish growth prospects at its matured Malaysian estates. We also gathered that the recent East Malaysia flood mainly affected residential areas. Hence, productivity impact was relatively minor and FFB production should be within seasonal patterns for Jan-15 (i.e. 10-15% below average). However, in the long-term, with 88% of the 25.3k ha planted area in Malaysia aged above 8 years, we think FFB growth in Malaysia will be flattish for the foreseeable future. However, note that its FY15E FFB growth of 11% remains stronger than its peer average of 7%.

Expansion to remain focused on Indonesia. Management has guided capex between RM150-RM200m in the next 2-3 years with RM20-30m maintenance capex allocated to Malaysian operations while the remaining is allocated to Indonesia. We understand that the bulk of capex allocation for Indonesia is for construction of new mills. Currently, IJMPLNT owns one mill in Indonesia and has another mill under construction. The company currently plans to operate four mills in total. This comes as no surprise as the capex range of RM150m-RM200m is within our estimate of RM170m in FY15E-FY16E. While we think that the company should still be able to support both capex and dividend payouts of 8.3 sen per share or RM71m through its operating cash flow of RM212m and cash balance of RM350m (or 41.0 sen per share), any new capex plans could raise FY15E net gearing beyond our estimated 0.3x and may lead us to revise our 45% dividend payout ratio assumption.

CPO production cost likely to remain flattish in FY15. Despite higher CPO production for the group, management views that CPO production cost per ton is unlikely to decline due to rising labor cost despite flattish fertiliser and fuel cost. We concur as we gather that despite lower crude oil prices, fertiliser cost tends to see a lag effect of at least six months due to forward buying by planters. Meanwhile, logistics cost are unlikely to decline any further as we understand that fuel prices have declined below the contractual floor rate of the suppliers. Furthermore, while high FFB growth in Indonesia is likely to lower CPO cost per ton, note that current CPO cost per ton in Indonesia is about RM1,700-RM1,800/MT, which is higher than Malaysia’s RM1,400-RM1,500/MT. Hence, FFB growth impact is unlikely to be able to offset the effect of rising costs on group’s overall production cost. Overall, we think that CPO production cost per ton is likely to increase in FY15E by 2% from RM1,530 to RM1,560/MT which is 14% above peers’ average of RM1,365/MT.

Estimating forex translation impact of RM9.0m from stronger USD. We estimate that IJMPLNT is likely to see a higher forex translation loss of RM9.0m due to the significant strengthening of the USD in 4QCY14. Note that IJMPLNT’s debt of RM664m is entirely denominated in USD and subject to currency translation risk from both IDR and MYR. From 3QCY14 to 4QCY14, the USD strengthened 7% against the ringgit from RM3.27 to RM3.50 per USD and 1% against the IDR from IDR12.21k to IDR12.38k per USD. All in, we think this should result in about RM9.0m in unrealized foreign exchange loss in the coming 3Q15 results. However, we are neutral on the impact as unrealized foreign exchange gains and losses are usually excluded from CNP calculations as non-cash item. Although a stronger USD is likely to result in higher net interest expense, the additional interest expense should remain <5% of estimated FY15 CNP of RM158m and hence is relatively insignificant.

Maintain FY15E-FY16E earnings estimate of RM158m-RM164m. We maintain our earnings estimate of RM158m-RM164m as FFB production guidance between 830m-940m MT and CPO cost of RM1560/MT are in line with our estimates. Our earnings estimate is above consensus expectations of RM130m-RM153m which we think under-appreciate IJMPLNT’s strong FFB growth prospects. We also maintain our dividend expectation of 8.3 sen per share which implies a 45% dividend payout ratio. This is in line with the 5-year historical payout ratio between 44%-51% and close to consensus estimates of 8.1 sen per share.

Maintain MARKET PERFORM on IJMPLNT with a TP of RM3.30 based on Fwd. PER of 17.3x on FY16E EPS of 19.1 sen. Our applied PER implies +0.5SD valuation on 3-year historical PER. We think valuations are justified due to its lower average age of trees of 7.2 years compared to peers of 10.4 years. However, we think that earnings growth may be limited by expected lower CPO prices of RM2,200/MT in FY15E. 

Source: Kenanga