IJM Plantations Berhad (IJMPLNT)’s 1H17 Core Net Profit (CNP*) of RM35.6m missed consensus at 31% and our forecast at 32% owing to weaker-than-expected margins due to slow Malaysian production recovery. No dividend was announced, as expected. We cut FY18-19E CNP by 24-22% to RM85.2-94.1m as we adjust up unit cost expectations. Downgrade to UNDERPERFORM (from MARKET PERFORM) with lower TP of RM2.50 (from RM3.15) post earnings cut.

1H18 misses expectations. IJMPLNT 1H18 CNP of RM35.6m missed both consensus’ RM116.2m forecast at 31% and our RM111.6m forecast at 32% due to higher-than-expected cost per unit and increased replanting cost. Note that this is the third quarter in a row that it has disappointed both consensus and our forecasts. FFB production at 466k metric tons (MT) was in line at 52% of our forecast. No dividend was declared, as expected.

Cost-push compressing margins. YoY, 1H18 CNP weakened 35% despite both higher CPO prices (+5%) and FFB production (+10%) as slow Malaysian production recovery (-19% YoY to 210.6k MT) resulted in higher unit costs in Sabah, which, combined with higher replanting costs, led to Malaysia PBT dropping by 63% to RM29m. Meanwhile, Indonesia PBT declined 44% due to forex losses on USD borrowings, excluding which PBT jumped 1.3x to RM23m on the back of +56% FFB production to 255.5k MT. QoQ, 2Q18 CNP was flat (+1%) amid lower CPO prices (-3%) and FFB production (-7%) due to better Indonesian core PBT (+80%) to RM15m thanks to higher PK sales (+1.7x to 2.7k MT) which offset softer Malaysian contributions (-32%) due to lower FFB production (-11%).

Sabah woes to continue into 1HCY18 as we expect the two-year stage of drought impact from 2016 to be felt in Sabah more drastically, leading to slower production recovery in the state and therefore continuing cost pressure for Sabah players in the medium term. Management similarly expects performance for the year to be “challenging due to the uncertainty in the recovery of crop production” especially in Malaysia. As such, we expect IJMPLNT’s production growth trajectory to be postponed to the following year, for FY18-19E FFB growth forecast of 0-12%, led by maturing Indonesian areas.

Cut FY18-19E CNP by 24-22% to RM85.2-94.1m as we adjust up our cost expectations in Malaysia to account for slower-than-expected production recovery in Sabah operations.

Downgrade to UNDERPERFORM with lower TP of RM2.50 (from RM3.15) post earnings downgrade as we roll forward our valuation base year to FY19E (from CY18E) for lower applied EPS of 10.7 sen (from 13.4 sen). We maintain our Fwd. PER of 23.5x PER implying +0.5SD valuation basis as long-term production prospects remain favourable. However, we expect short-term production weakness, especially in Sabah which has historically been IJMPLNT’s profit driver, to continue to limit margins in 2H18. As such, we downgrade our call to UNDERPERFORM reflecting continued short-term earnings risk.

Source: Kenanga Research - 29 Nov 2017