IJM Plantations Berhad (IJMPLNT) recorded 9M18 Core Net Profit (CNP*) of RM48.4m, missing consensus and our expectations at 53% and 58%, respectively, on slower-than- expected margin improvement due to start-up yields in Indonesia. No dividend was announced, as expected. We cut FY18-19E CNP by 16-14% to RM71.5-81.3m to account for higher unit cost in Indonesia. Maintain UNDERPERFORM with a lower TP of RM2.00 (from RM2.50).

9M18 below expectations. IJMPLNT 9M18 CNP of RM49.4m came in below both consensus estimate of RM92.9m at 53%, and below our RM85.2m forecast at 58%. However, FFB production at 707k metric tons (MT) is in line at 78% of our forecast, which indicates that unit costs have yet to recover from the poor yields in the previous quarters. No dividend was declared, as expected.

Stubborn costs. YoY, 9M18 CNP plunged 48% in spite of higher CPO prices (+5%) and FFB production (+10%) as costs remained stubbornly high. This was due to higher labour and replanting costs in Malaysia, while Indonesia saw poor unit cost as startup yields in newly matured area could not offset high overheads and full plantation maintenance cost. QoQ, CNP fell 22% on high deferred taxes mostly from Indonesia amounting to RM11.6m. Otherwise, Malaysia profit saw a solid improvement (+2x) as Sabah production jumped 34% to 133k MT, but Indonesia recorded operating losses of RM2m as Kalimantan production declined 14% to 108k MT due to regional wet weather.

Gestation period. Despite better prospects in Malaysian operations and rising production in Indonesia, management noted that unit costs will continue to be pressured by start-up yields in its newly matured Indonesian area, which is incurring full maintenance and overhead charges, leading to a very high unit cost per ton of CPO production. As such, management “expects a lower performance” for the current year.

Downgrade FY18-19E CNP by 16-14% to RM71.5-81.3m as we adjust up our unit cost estimates in Indonesia to account for full overhead costs. We maintain our FFB growth expectations at 0-12%.

Maintain UNDERPERFORM with lower TP of RM2.00 (from RM2.50) post earnings downgrade for lower FY19E EPS of 9.2 sen (from 10.7 sen) and also lowering our Fwd. PER to 21.5x (from 23.5x or +0.5SD valuation basis) implying mean valuation basis as we expect flat short- term production growth coupled with stubbornly high production costs that may well extend into early FY19. Despite the good recovery in IJMPLNT’s Sabah estates, profit margins may continue to be negatively impacted by full overhead charges on very young estates in Indonesia. Thus, we maintain our near-term UNDERPERFORM call on IJMPLNT.

Risks to our call include: (i) better-than-expected production pickup in Indonesia, (ii) lower-than-expected increase in production cost, and (iii) higher-than-expected CPO prices.

Source: Kenanga Research - 28 Feb 2018