We recently met up with IJMPLNT's Chief Financial Officer & Executive Director Mr. Purushothaman Kumaran and came away maintaining our positive longterm growth outlook for the company, but more conservative on its short-term prospect, given weakerthan- expected production in Malaysia and softer Indonesian prices due to the structural issue of CPO levies. Consequently, we downgrade our FY16-17E earnings forecast by 29-8% to RM76-139m. No change to our MARKET PERFORM call, although we lower our TP to RM3.71 based on updated Fwd. PER of 23.5x (from 22.0x) reflecting +0.5SD valuation, applied to lower FY17E EPS of 15.8 sen (from 17.1 sen).

Weaker FY16E production - expect recovery in FY17. We gather that the drought has hit production strongly in Sabah, with management expecting potential YoY decline of 19% in FY16 offsetting Indonesian growth of +36%. This is higher than our initial FY16E growth of -11% for Malaysia. After imputing weaker Malaysian production, we revise down our FY16E FFB growth to - 2% (from +3%) but with FY17E numbers largely unchanged, we raise FFB growth to 16% (from 11%) due to the low base effect.

Structurally lower CPO prices in Indonesia. Management mentioned that Indonesian CPO price discount to Malaysian CPO prices has increased to RM250-350 on the imposition of CPO levies in mid-15. We gather that the levy of USD50/MT accounts for RM200-220 of price gap while the balance is due to exchange rate difference and shipping discounts (due to FOB sales basis). As a result, we believe that CPO prices seen in Indonesia are close to breakeven levels. Hence, earnings in the next 1-2 quarters will likely be driven by Malaysian operations, which are facing softer production as discussed above.

Weaker production to increase unit cost. Management noted that softer production in Malaysia will likely increase CPO cost per hectare. However, in terms of cost drivers, higher labour costs are offset by lower maintenance costs due to lower productivity. Meanwhile, fertiliser costs are relatively flat as suppliers are reluctant to reduce prices in anticipation of stronger USD going forward. Although the actual production cost is unchanged, lower CPO production could result in CPO cost/ha rising 13% to c.RM1,700/ha.

Maintain MARKET PERFORM with lower TP of RM3.71 (from RM3.76). After imputing the weaker production prospects, we lower our FY16-17E CNP by 29-8% to RM76-139m. As a result, our TP is reduced to RM3.71 (from RM3.76) based on FY17E EPS of 15.8 sen (from 17.1 sen) and a higher updated Fwd. PER of 23.5x (from 22.0x). Our Fwd. PER of 23.5x is based on +0.5SD valuation which is fair given IJMPLNT's above-average FY17E FFB growth of 16% vs. the sector average of 6%. However, we retain our MARKET PERFORM call as the decent long-term growth outlook is offset by weaker near-term earnings prospects.

Source: Kenanga Research - 29 Mar 2016