IJM Plantations Berhad (IJMPLNT)’s Core Net Profit (CNP*) of RM17.7m disappointed, making up 13% of consensus and 14% of our forecasts, due to higher-than-expected operating cost for the quarter. No dividend was announced, as expected. Reduce FY18-19E CNPs by 17-14% to RM107- 129m. Maintain OUTPERFORM with lower TP of RM3.30 (from RM3.60).

1Q18 below expectations. IJMPLNT 1Q18 CNP at RM17.7m missed both consensus expectation (RM136.7m) at 13% and our forecast (RM129.8m) at 14% on higher-than-expected maintenance cost. No dividend was declared, as expected. FFB production at 242k MT was in line at 27% of our forecast.

Lingering drought effect. YoY, 1Q18 CNP softened 11% in spite of higher FFB production (+26%) due to higher cost as Indonesia operations EBIT fell 57%. We gather that the Kalimantan area continued to see low start-up yield due to young average age, which also led to higher unit cost per metric ton (MT). This was partly offset by CPO price improvement of +7% to RM2,753/MT. QoQ, CNP was flattish (-2%) chiefly on lower tax cost (-43%). Lower CPO (-10%) and PK (-34%) prices, were partly offset by seasonal improved FFB production (+22%). However, Indonesian EBIT weakened 51% on higher unit cost as discussed above.

Production outlook still solid as we expect double-digit Indonesian production in view of high maturing hectarage of c.2,700 hectares (ha) in FY18E. Meanwhile, we expect positive Malaysian production as Sabah goes into high production season over 2Q18. We expect group FFB production to see consistent growth at 5-15% in FY18-19E, above the sector average of 8%. We note that maintenance costs including fertilizer applications tend to be higher in earlier parts of the year, which could explain the higher costs this quarter. Looking ahead, with higher productivity, we expect unit costs to decline, which should improve fullyear margins.

Lower FY18-19E CNPs by 17-14% to RM107-129m to reflect higher unit cost for Indonesian FFB production.

Maintain OUTPERFORM with lower TP of RM3.30 (from RM3.60) post-earnings upgrade while we roll forward our valuation base year to CY18E (from average CY17-18E) for lower applied EPS of 14.1 sen (from 15.3 sen). Our Fwd. PER is unchanged at 23.5x PER, as we maintain our valuation basis of +0.5SD, in line with other planters with above-average FFB growth prospects. Although the 1Q18 earnings disappointment may prompt some profit taking among short-term investors, we believe this could provide compelling upside for the stock given our expectation of better quarters ahead, while long-term earnings risk is lessened by the company’s high volume of maturing landbank. Thus, we reiterate our OUTPERFORM call on IJMPLNT.

Source: Kenanga Research - 24 Aug 2017