1Q17 CNP at RM8.2m missed both consensus (12%) and our forecast (11%) owing to lagging production recovery due to 2015 droughts. No dividend announced, as expected. We cut FY17-18E earnings forecasts by 33-21% reflecting slower production recovery but maintain OUTPERFORM with a lower TP of RM6.50 post-earning revision as we roll forward our valuation base year to CY17E.

Below expectations. United Malacca Berhad (“UMCCA”)’s 1Q17 CNP came in at RM8.2m, making up 12% of consensus’ RM65.6m forecast and 11% of our RM71.9m forecast. This was mainly due to weakerthan- expected FFB production recovery, which made up only 20% of our full-year expectation due to 2015 droughts as well as higher-thanexpected cost from newly matured area. No dividend was announced, as expected.

Gradual production recovery. YoY CNP declined 40% despite CPO prices improving 13% and PK prices jumping 61%. This was mainly due to weaker FFB volume (-15%) which led to higher production cost per ton and thus weaker margins. QoQ, CNP weakened 39% as CPO prices were flat at +2% while PK prices increased 11%. We believe this was because FFB volume recovery (+42%) was led by production from 1.7k ha of newly matured area in Indonesia which saw higher fixed cost and thus weaker margins.

Better days ahead. With stable weather and supportive CPO prices, we expect production and earnings recovery to continue in the coming quarters, particularly in 2Q17 (peak production) and 4Q17 (post-drought recovery). Over the long-term, production costs should normalise as the new Indonesian area continues to mature. Management noted that 833 ha of new area is expected to mature in FY17, which should contribute to above-average FY17-18E growth of 10-14%, compared to the sector CY16-17E average of 2-10%.

Cut FY17-18E CNP by 33-21% to RM48-70m. We cut our FY17-18E earnings by 33-21% as we adjust our FFB growth forecast from 14-9% to 10-14% as we move forward FY17E production to FY18E to account for slower production recovery. We also revise up our cost assumptions to reflect higher fixed expense resulting in higher cost/MT in Indonesian operations.

Maintain OUTPERFORM with lower TP of RM6.50 (from RM7.42) as we: (i) account for lower FY17-18E earnings and (ii) roll forward our valuation base year to CY17E (from FY17E) for CY17E EPS of 31.0 sen (from 35.4 sen). We maintain our Fwd. PER of 21.0x which is based on +0.5SD valuation in line with other planters with above-average growth prospect. We also like UMCCA for its long-term growth potential, given its young average tree age and possibility of further upstream/midstream expansion in Indonesia. We also note the potential crop diversification beyond palm oil, which should reduce price risk from fluctuations in CPO prices in the long-run.

Source: Kenanga Research - 23 Sep 2016