United Malacca Berhad (UMCCA)?s 1Q18 Core Net Profit* (CNP) came in at RM6.7m, missing both consensus and our forecasts at 9% of full-year estimates due to higher unit costs as low-yield young trees matured. No dividend was announced, as expected. We reduce our FY18-19E CNP by 5%. Maintain OUTPERFORM on UMCCA with lower TP of RM7.30 (from RM7.60), though share price may be hit in the short-term by this earnings miss.

1Q18 below expectations. 1Q18 CNP came in at RM6.7m, falling short of both consensus RM71.0m and our RM77.7m estimate at only 9%. This was due to the high maturing area of 1,679 hectares (ha) in Sabah and 2,961 ha in Indonesia leading to lower average yields and hence higher unit costs. Note that FFB production at 83.5k metric tons (MT) is slightly softer than expected, at 22% of our full-year forecast. No dividend was announced, as expected.

Production improvements. YoY, CNP softened 18% largely on higher unit cost as noted above. On the top-line, CPO prices improved 8% to RM2,721/MT offsetting lower PK prices, which declined 16% to RM2,070/MT. FFB improved 8% to 83.5k MT resulting in overall external revenue improvement of 26%. QoQ, CNP dropped 74% due to higher maturing area recognized. This was compounded by lower CPO prices (-11%) and PK prices (-29%) despite higher FFB production (+3%) leading revenue to slip by 4%.

Temporary setback. Management continues to expect higher FFB production on its substantial maturing area. While we trim our estimates slightly to reflect lower group yields, we continue to expect above-average FY18-19E FFB growth of 16-16% (from 23-14%), well exceeding the sector average of 8%. We expect better quarters ahead as we enter the high production seasons between Sep-Nov for both Sabah and Kalimantan. Meanwhile, long-term prospects could be supported by its JV in Sulawesi, Indonesia to diversify its crop base with a concession right to develop 59.9k ha of forest area with a non- palm oil cash crop.

Reduce FY18-19E CNP by 5% to RM73.6-75.5m as we update our yield assumptions as mentioned above.

Maintain OUTPERFORM with lower TP of RM7.30 (from RM7.60) as we roll forward our valuation base year to CY18E (from average CY17- 18E) and incorporate our earnings adjustment for lower EPS of 35.9 sen (from 37.3 sen). Our Fwd. PER is unchanged at 20.4x based on +0.5 SD valuation basis. This is in line with planters with above- average FFB growth outlook. In spite of the soft 1Q18 performance, we note that this quarter tended to be the weakest quarter for UMCCA with a 5-year historical average of 22% of full-year profits, while 2Q-3Q contributed up to 55% of full-year profits. FY17 which also had high maturing acreage of 2,500ha, saw similar earnings performance with 1Q17 making up merely 11% of full-year contribution. As such, we expect to see better core profit contributions in the coming quarters. While share prices may take a hit in the near-term, we maintain our positive long-term outlook in view of UMCCA?s high FFB growth prospect and potential diversification plans.

Source: Kenanga Research - 20 Sep 2017