We recently met with UMCCA CEO Mr Peter Benjamin and came away maintaining our positive view on the company’s medium-to-long term prospects, thanks to high maturing hectarage, continued efficiency upgrades and crop diversification plans. No changes to FY18-19E earnings as updates are within our expectations. Maintain OUTPERFORM with unchanged TP of RM7.60 based on Fwd. PER of 20.4x.

Optimistic outlook. We recently met up with United Malacca Berhad (UMCCA) CEO Mr Peter Benjamin and returned with our positive outlook maintained on the back of high maturing hectarage in FY18, ongoing efficiency upgrades such as mechanization and drip irrigation systems, and long-term crop diversification plans.

Growth intact. We understand that production growth in FY18 will remain high, with management projecting c.15% FFB growth, which is largely in line with our FY18-19E forecasts of 19-15%. We are positive on UMCCA’s production outlook, thanks to its 4.9k hectares (ha) of maturing area in FY18, of which 1.9k ha is located in Malaysia and 3.0k ha is in Indonesia. This represents 9% of total Malaysian planted area and a substantial 50% of Indonesian planted area. Long-term outlook is similarly positive, with average age in Malaysian estates at the prime age of 10.6 years, while the average age of its Indonesian estates is still young at 3.0 years. However, we expect production to pick up more strongly in 2Q18, as Sabah output in 1Q18 may still be dampened by the previous mid-2016 dry period.

Efficiency drive continues. Management noted that they continue to implement mechanization measures across their estates, with equipment such as mini-tractors and fertilizer spreaders that reduce labour dependency. On the production side, the company has also constructed additional water management systems and added water conservation trenches at its estates, in addition to testing its drip irrigation systems, which are showing promising yield results at the trial plots. With the efficiency measures and rising yield outlook, we expect FY18-19E cost per ton to decline closer to c.RM1,300/metric ton (MT) from c.RM1,500/MT in FY17.

Sulawesi extension not a huge concern. On 28-Jul, UMCCA announced a three-month extension on the exclusivity period of its MOU with Adhi Indrawan and Kartika Dianningsih Antono for the development on 59.9k ha of industrial plantation forest area in Central Sulawesi, Indonesia. We are not overly concerned on the extension as we understand that the company is finalizing details of the joint-venture. Recall that the Sulawesi area is allocated to non-palm cash crops. Should the company embark on a mix of rapid-maturing crops and long-term crops, we would expect to see planting activities at the site from next year onwards and initial contributions in FY19. We remain positive on the venture as the potential diversification of UMCCA’s crop base should reduce the share price impact arising from CPO price fluctuations.

Maintain OUTPERFORM with unchanged TP of RM7.60 based on Fwd. PER of 20.4x applied to unchanged average CY17-18E EPS of 37.3 sen. Our valuation basis is maintained at +0.5SD, which is on par with other planters with above-average FFB growth. We continue to like UMCCA for its positive FFB growth outlook thanks to a young average tree age, continued efficiency measures for both cost and production, as well as long-term diversification plans, which should reduce the risk of CPO price fluctuations.

Source: Kenanga Research - 03 Aug 2017