Period

3Q16/9M16

Actual vs. Expectations

United Malacca Berhad (UMCCA)’s 9M16 Core Net Profit (CNP*) at RM33.8m was within consensus forecast (RM47.5m) at 71% but came in below our forecast (RM53.3m) at 63% due to lower-thanexpected average CPO price at RM2,144/metric ton (MT) vs. our CY15 RM2,200/MT forecast.

Dividends

No dividend was announced as expected.

Key Results Highlights

YoY, 9M16 CNP declined 12% as CPO prices declined 6% to RM2,144/MT, compounded by lower FFB production of 5% to 256.7k MT. Investment holdings’ PBT doubled to RM11.3m due to unrealised forex gains (RM7.3m). However, excluding forex gains, investment holdings’ PBT would have declined 26% to RM4.0m.

QoQ, 3Q16 CNP declined 35% as FFB volume dropped 32% to 67.5k MT which could not be offset by better CPO (+5%) and PKO (+20%) prices. Investment holdings’ PBT picked up 5x to RM8.6m due to unrealised forex gains (RM6.8m) which if excluded would see the segment improved by only 23% to RM1.8m.

Outlook

The severe droughts in Sabah will continue to impact planters’ yields at least up to mid-CY16. As a result, we lower our FY16-17E Malaysian FFB growth forecast from 6% and 4% to -2% and +8%. However, FY17E group FFB growth is higher due to contributions from its new Indonesian estates at +15%, well above the sector average of +6%. Hence, we remain long-term positive on UMCCA’s growth prospects.

Change to Forecasts

We reduce FY16-17E CNP by 10-13% to RM47.9- 71.9m to account for lower Malaysian production and reflect higher interest cost post-Indonesian acquisition.

Rating

Maintain OUTPERFORM

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

Valuation

We lower our TP to RM7.42 (from RM7.50) as we roll forward our valuation base year to FY17 while lowering our earnings forecasts as above. Fwd. PER is maintained at 21.0x, based on +0.5SD valuation. We believe this is fair as UMCCA’s FY17E FFB growth prospect at 15% is well above the sector average (+6%). Furthermore, we think that UMCCA’s Indonesian expansion bodes well for its mid-to-long-term earnings growth given its high quantum of maturing area, young average tree age, and space for up/midstream expansion.

Risks to Our Call

Lower-than-expected CPO prices.

Lower-than-expected FFB volume.

Source: Kenanga Research - 30 Mar 2016