Period  3Q15/9M15

Actual vs. Expectations  IJM Plantation (IJMP)’s 9M15 core net profit (CNP*) of RM110m exceeded consensus expectations (RM129m) at 84% but and came in broadly within ours (RM158m) at 69%. We think this is because consensus estimates has under-estimated IJMP’s strong FFB growth.

Dividends  None as expected.

Key Results Highlights

 YoY, 9M15 CNP rose 22% to RM110m. Despite flat 9M15 CPO prices at RM2,319/metric ton (MT), IJMP saw strong FFB volume growth (+30% to 698k MT) as well as better PK Oil prices (+25% to RM3,307/MT).

 QoQ, 3Q15 CNP slipped 5% due to higher tax cost (+45% to RM12m) due to higher non-deductible expenses. However, group PBT rose 13% as Indonesian operations broke even against LBT of RM3m in 2Q15.

Outlook  In the short-term, we think 4Q15 should see better earnings as we expect to see slight FFB production improvement, while CPO prices QTD are higher against 3QFY15, averaging RM2,282/MT (+4% vs 3Q15’s RM2194/MT). But in the long-term, we are neutral on plantation outlook as we think that CPO prices are likely to decline in 2H15 to average RM2,200/MT in CY15.

 Management has guided that production cost pressure could persist in Indonesia due to higher maintenance and overhead costs.

Change to Forecasts  We trim our FY15-16E CNP estimate by 5%-2% resulting from the net negative impact from tweaking-up our group FFB production estimates higher by 5%-6% to 847k-955k MT and increase estimated CPO cost/MT by 7%-6% to RM1,500- RM1,420 in line with management expectations of higher costs.

Rating Downgrade to UNDERPERFORM (from MARKET PERFORM)

Valuation  We raise our TP to RM3.57 (from RM3.30) based on higher 19.0x Fwd. PER @ +0.5SD to historical mean which more than negated the impact of our reduced FY16E EPS. Previously, our +0.5SD valuation basis implied 17.3x Fwd PER; but the stock has rerated up over the last 12 months, thanks to its higher-than-average FFB growth rate, resulting in higher historical averages. Even so, our raised TP is still below last price, implying that current valuations could be a bit stretched.

 Also, despite its lower market cap, IJMP’s current FY15E PER of 21.6x is close to or higher than some big cap planters such as SIME (19.0x Fwd. PER) and KLK (21.6x Fwd. PER). Thus, due to stretched valuations, we downgrade IJMP to UNDERPERFORM (from MARKET PERFORM).

Risks to Our Call  Higher-than-expected CPO prices.

 Higher-than-expected FFB growth. 

Source: Kenanga