Period

2Q16/1H16

Actual vs. Expectations

IJM Plantation (IJMPLNT)’s 1H16 core net profit (CNP*) of RM69.6m is broadly within consensus (RM121.4m) at 57% hit rate but below ours (RM153.9m) at 45%. We deem the 1H16 results as below our expectations as we expect 2H16 earnings to be weaker due to the double impact of seasonal downtrend and recent droughts.

Note that 2Q16 reported net loss was actually RM4.9m which included RM45.9m of unrealised forex translation losses.

Dividends

No dividend was announced, as expected.

Key Results Highlights

YoY, 1H16 CNP declined 11% due to lower CPO prices (-12% to RM2,105/metric tons (MT)) and PKO prices (-11% to RM3,094/MT), while FFB production was flat at 462k MT.

QoQ, 2Q16 CNP rose 43% to RM41.0m on tax credits (RM17.7m). Stripping off forex losses of RM45.9m, core PBT would be RM13.6m (-47%). This was due to its weaker Indonesian operations at RM10.6m core LBT (ex-forex: RM45.9m), from RM6.3m core PBT (ex-forex: RM5.7m). Its Indonesian operations saw losses as lower CPO prices (-5% to RM2,050/MT) and maintained costs level resulted in depressed margins.

Outlook

We expect CPO prices to improve to RM2,400/MT (+9%) in CY16. However, 2H16 production could be weaker than 1H16 as the recent Sabah/Kalimantan drought impact could be exacerbated by seasonal downtrend. Hence, we cut our FY16-17E FFB growth forecasts to -1% and 9% (from 23-12%). Nevertheless, FY17E FFB growth at 9% is still higher than CY16E sector average of 6%.

Change to Forecasts

We lower our FY16-17E CNPs by 15-6% to RM131-170m after reducing our FFB forecasts as above.

Rating

Maintain MARKET PERFORM Short-term outlook is weaker on lower FFB production expectations, but we are positive for the long-term due to higher FY16E CPO prices and IJMPLNT's relatively young average trees age of 8.1 years.

Valuation

We up our TP to RM3.64 (from RM3.50) based on an unchanged 20x Fwd. PER, as we roll forward our valuation base year to CY16 (from FY16) on Fwd. EPS of 18.2 sen. Our Fwd. PER implies a +0.5SD valuation which we think is fair due to IJMPLNT’s higher-than-average FFB growth outlook. Note that we assign mean valuation to planters with average FFB growth (6%).

Risks

Lower-than-expected CPO prices.

Lower-than-expected FFB growth.

Source: Kenanga Research - 25 Nov 2015