Period

2Q16/1H16

Actual vs. Expectations

United Malacca Berhad (UMCCA)’s 1H16 Core Net Profit (CNP*) at RM25.8m was below expectations at 43% of consensus (RM59.9m) and 39% of our forecast (RM66.8m). This was due to lower-than-expected CPO prices at RM2,139/metric ton (MT) vs. our CY15E RM2,200/MT forecast.

UMCCA also proposed to acquire an 83% stake in PT Lifere Agro Kapuas (LAK) from Lincoln Wilshire Investments Ltd. (Lincoln) for a total cash consideration of USD66.4m or RM285.0m. LAK holds the plantation license to 24.6k ha of plantation land of which 10.4k ha is planted area (refer to details overleaf).

Dividends

A First Interim Dividend of 8.0 sen was announced, making up 41% of our FY16E DPS of 19.7 sen. We deem this in line as historically UMCCA pays out a higher dividend in 4Q.

Key Results Highlights

YoY, 1H16 CNP declined 6% to RM25.8m mainly on lower CPO prices (-7% to RM2,139/metric ton (MT)). This was partly offset by higher FFB volume at +11% to 189.2k MT.

QoQ, 2Q16 CNP declined 10% despite FFB volume improvement (+10% to 99.1k MT) which failed to offset lower CPO prices (-8% to RM2,047/MT).

Outlook

We are long-term positive on UMCCA's proposed LAK acquisition. Although we expect FY16E earnings to be diluted, the acquisition will likely be earnings accretive from FY17E onwards with an estimated net contribution of RM13.4m. The new area has a very young average age with 99% of trees below 5 years. We estimate the new area to reduce UMCCA's average tree age from 9.7 years to 7.4 years.

Management expects severe droughts in Sabah to negatively impact FFB production in FY16. We think the lagged production impact could extend into FY17 as well, hence we have lowered our Malaysian FFB growth forecast from 8-5% to 6-4%. However, FY16-17E group FFB growth is expected to improve 6-14%.

Change to Forecasts

We lower FY16-17E CNP by 22-1% to RM51.9m-RM76.4m. Lower Malaysian growth prospects in FY16-17E is offset in FY17E by FFB contribution from the new Indonesian landbank. Hence FY17E earnings impact is overall neutral.

Rating

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We believe UMCCA's long-awaited maiden expansion outside Malaysia will serve as a re-rating catalyst as the doubled landbank with existing young planted area should lead to above-average FFB growth for the long run.

However, note that 3Q16 earnings could be softer as lagged drought impact and seasonal downtrend is likely to hit FFB production.

Valuation

We up our Target Price to RM7.05 as we roll forward our valuation base year to CY16E for higher EPS of 33.6 sen (from 32.8 sen). We also apply a higher Fwd. PER of 21.0x (from 19.2x) as we up our valuation basis to +0.5SD (from mean valuation). We believe this is fair as UMCCA's FY17E FFB growth prospect at 14% is above the sector average (+6%), plus its major landbank acquisition warrants a re-rating.

Risks to Our Call

Lower-than-expected CPO prices.

Lower-than-expected FFB volume.

Source: Kenanga Research - 16 Dec 2015