United Malacca Berhad (UMCCA)’s 1H17 CNP of RM28.7m was within consensus and above our forecast at 53% and 56%, respectively, on higher CPO and PK prices. Interim dividend of 8.0 sen was announced, within expectations. We upgrade earnings by 9-7% to RM55.6-75.5m as we update CY16-17E CPO price assumptions to RM2,600- 2,550/MT. Maintain OUTPERFORM with higher TP of RM7.11 (from RM6.50).

1H17 meets consensus estimates, beats ours. 1H17 Core Net Profit (CNP*) came in within consensus’ RM54.4m forecast at 53%, and above our RM51.3m estimate at 56%, largely on higher-than-expected CPO prices received. An interim dividend of 8.0 sen was announced, in line with expectations.

Price-led bounce. YoY, CNP rose 11% as CPO prices increased 23% while PK prices jumped 75%. This more than offset weaker FFB volume at -12% due to lingering drought effect. Thanks to higher prices, Malaysian operations PBT contribution jumped 39% while initial Indonesian losses were fairly minimal at RM0.2m. QoQ, CNP jumped 1.5x led by a sharp 137% jump in Malaysia PBT contribution, as FFB production recovered 18%, while CPO and PK prices rose 8% and13%, respectively. With better prices and production, Indonesian operations saw a turnaround with PBT of RM0.8m, from loss of RM1.0m previously.

Prices to support production recovery. While 3Q17 outlook may slow down on production low season, we expect better YoY performance in 4Q17 on post-drought recovery. Production cost should normalize in the long run as young Indonesian area (currently c.3.3 years) matures. We expect UMCCA to see sustained FY17-18E above- average FFB growth at 10-14%, compared to the sector’s CY16-17E average of 1-7%. Its proposed JV in Sulawesi could also provide long- term earnings diversification as the company explores alternative crops with shorter maturity horizon compared to palm oil.

Increase FY17-18E CNP by 9-7% to RM55.6-75.5m from RM51.3- 70.5m as we upgrade our CY16-17E CPO price assumptions to RM2,600-2,550/MT, from RM2,500-2,400/MT previously (please refer to our Plantation Sector Update published 15-Dec for details).

Maintain OUTPERFORM with higher TP of RM7.11 (from RM6.50) based on unchanged Fwd. PER of 21.0x applied to higher CY17E EPS of 33.9 sen (from 31.0 sen) post-earnings upgrade. Our Fwd. PER of 21.0x is based on unchanged +0.5SD valuation, which is in line with other planters with above-average FFB growth potential. We like UMCCA for its long-term sustainable production growth outlook, its room to grow in Indonesia in both the upstream and midstream segments, as well as diversification plans beyond palm oil, which reduces price risk from CPO price fluctuations.

Source: Kenanga Research - 19 Dec 2016