IJM Plantations (IJMPLNT)’s FY16 CNP at RM33.3m missed consensus and our forecast at only 37% and 44% with a RM41m CNL in 4Q16 as its Malaysian FFB production was nearly halved (-48%) QoQ due to lagged drought impact. FY16 DPS of 5.0 sen announced, slightly above our 4.0 sen forecast. We downgrade our call to UNDERPERFORM (from MARKET PERFORM) and TP to RM3.15 (from RM3.71) as we lower our FY17E CNP by 21% on lower FFB production outlook.

Below expectations. FY16 CNP came in at RM33.3m, missing both consensus’ (RM89.9m) and our forecast (RM76.0m) at 37% and 44%, respectively. This came as 4Q16 saw CNL of RM41.3m, due to a sharp drop in FFB volume (-35% QoQ) resulting in core LBT for their Malaysian operations of RM6.7m (after RM6.2m fair value loss on CPO swaps). Tax charge was also sharply higher at RM28.4m (3x YoY) on derecognition of deferred tax assets at RM10.4m.

Casualty of droughts. YoY, CNP declined 77% on a combination of lower CPO prices (Malaysia: -6%, Indonesia: -11% due to export levy), and weaker FFB volume (Group: -2%; Malaysia: -19%; Indonesia +35%) due to severe drought impact in Sabah. The sharp drop in Malaysian FFB production weakened PBT by 60%, more than negating Indonesian operations’ improvement from RM34.3m loss to a breakeven of RM0.3m.

QoQ saw CNL of RM41.3m on CPO price improvement (Malaysia: +7%; Indonesia: +14%) failed to offset sharply weaker production in both Malaysia (-48%) and Indonesia (-22%) leading to LBT of RM12.9m in Malaysia and -60% PBT in Indonesia.

Production impact extending into FY17E. Management mentioned that the 2015 drought could continue to impact Malaysian production for the next 15-18 months. We gather that Indonesian production should continue growing as its younger trees are less severely hit by the drought. Overall, we lower our growth assumptions in Malaysia to flat levels resulting in FY17-18E FFB growth of 8-12% (previously FY17E of +16%).

Lower FY17E CNP by 21% to RM110m as we have reduced our growth outlook. We also introduce our FY18E CNP of RM142m. Downgrade to UNDERPERFORM with lower TP of RM3.15 (from MARKET PERFORM; TP: RM3.71) as we account for lower earnings, and roll forward our valuation base year to 1HCY17 (from FY17), for applied EPS of 13.4 sen (from 15.8 sen). Our Fwd. PER is maintained at 23.5x based on +0.5SD valuation, as IJMPLNT’s FFB growth remains above sector average (+1-8%). Nevertheless, we downgrade our call to UNDERPERFORM as we believe the market has yet to digest IJMPLNT’s weaker production outlook. We would look to upgrade the stock once Malaysian production recovers closer to historical yields.

Source: Kenanga Research - 27 May 2016