United Malacca Berhad (UMCCA)’s 1H18 Core Net Profit* (CNP) of RM21.4m came in below both consensus and our forecast at 27% and 29%, respectively, on higher-than- expected unit cost from newly matured area. An interim dividend of 6.0 sen was announced, missing our 23.0 sen estimate. We reduce our FY18-19E CNP by 12-1% and revise our call to MARKET PERFORM with lower TP of RM6.80 (from RM7.15) based on unchanged 20.4x Fwd. PER.

1H18 misses expectations. UMCCA’s 1H18 CNP at RM21.4m came in under consensus’ RM79.2m forecast at 27% and below our RM75.1m estimate at 29% owing to higher-than-anticipated production cost per metric ton (MT) coming from newly matured Indonesian and Malaysian area. We note that FFB production at 181.6k MT was in line with our expectations at 49%. An interim dividend of 6.0 sen was announced, which we deem below expectations as it made up 26% of our full-year estimate, and declined 25% against the last 3 years’ 1H dividend payout of 8.0 sen. However, we expect to see higher dividend declared in 2H18, in line with historical payout patterns.

High cost. YoY, CNP softened 25% on thinner margins due to newly maturing area in both Malaysia (1.7k ha; c.8% of planted area) and Indonesia (3.0k ha; c.26% of planted area) which resulted in lower PBT in Malaysia (-21%) and wider LBT in Indonesia to RM2.0m (from RM0.2m). This was compounded by lower PK prices (-12%) although higher CPO prices (+3%) and FFB volumes (+8%) partly stemmed the decline. QoQ, CNP jumped 120% as Malaysia contribution doubled on the back of stronger FFB production (+18%) and PK prices (+22%). Indonesian LBT was unchanged at RM1.0m due to the high volume of low yielding newly matured area.

Better 2H18 ahead. We continue to expect double-digit FFB growth for the full year at 16%, well exceeding the sector average of 8%. With a better 2H growth outlook, we think unit costs should see slight improvement albeit management guidance that higher FFB production would not translate into proportionately higher profit due to the higher cost of production. We also look forward in CY18 to seeing initial progress towards the development of UMCCA’s newly acquired Sulawesi area intended for expansion of non-palm cash crops such as stevia, coffee, cocoa or coconut, which should reduce earnings volatility due to palm oil’s seasonality and price movements.

Reduce FY18-19E CNP by 12-1% to RM66.2-71.5m on updated cost assumptions due to newly matured area.

Update to MARKET PERFORM with Lower TP of RM6.80 (from RM7.15) on lower CY18E EPS of 33.3 sen (from 35.1 sen) post earnings adjustment. 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. While we continue to see positive long- term prospects for UMCCA given the growth potential of its significant young mature area as well as earnings diversification plans, we think the market has priced in the medium-term growth potential in view of the strong share price performance to-date (+13%). Thus, we revise our call to MARKET PERFORM (from OUTPERFORM) in line with our ratings definition.

Source: Kenanga Research - 19 Dec 2017