United Malacca Berhad (UMCCA)’s 9M18 Core Net Profit* (CNP) of RM30.3m missed consensus and our estimate at 40% and 46%, respectively, on higher-than-expected unit cost from newly matured area and softer yields in the wet season. No dividend was declared, as expected. We reduce FY18-19E CNP by 24-22%. No change to our MARKET PERFORM call with lower TP of RM6.20 (from RM6.80) accounting for lower earnings estimates.

9M18 below expectations. UMCCA recorded 9M18 CNP of RM30.3m, which came in below consensus’ RM76.6m forecast at 40%, and missing our RM66.2m estimate at 46%, due to higher-than-anticipated production cost per metric ton (MT) coming from newly matured area, compounded by softer yields due to wet weather during the quarter. We observe that the FFB production at 286.5k MT is in line with our expectation at 79%. No dividend was declared, as expected. Note that our 3Q18 CNP calculation excludes unrealised forex gains of RM11.9m due to ringgit appreciation in the quarter affecting UMCCA’s dollar- denominated loan.

Slowed by start-up yields. YoY, CNP weakened 39% largely on lower margins, arising from low yields at newly maturing area in both Malaysia (1.7k ha; c.8% of planted area) and Indonesia (3.0k ha; c.26% of planted area) and wet weather during the quarter which affected harvesting. In spite of this, and weaker CPO prices (-4%), we note that FFB volume increased 19%, while revenue rose 5%. Nevertheless, the margin compression led to lower PBT in Malaysia (-19%) while Indonesia saw LBT of RM3.4m (from PBT of RM2.3m in 9M17). QoQ, CNP dropped 40% led by weaker CPO prices (-5%) and poorer performance in Indonesia, which saw higher LBT of RM1.4m (from RM1.0m). Malaysia PBT was, however, flat at RM20.2m.

Yield and cost setbacks. Although FFB production growth remains on track with our estimates, we expect higher unit costs to continue dragging earnings in the mid-term. We concur with management’s warning of “substantially lower” profit in FY18 as CPO and PK prices are set to weaken in 2HCY18. However, long-term prospects remain intact in our view, with the development of UMCCA’s Sulawesi area intended for expansion of non-palm cash crops such as stevia, coffee, cocoa or coconut, which should reduce earnings volatility by reducing its over-reliance on palm oil.

Reduce FY18-19E CNP by 24-22% to RM47.3-60.0m on updated cost assumptions due to lower-than-expected yields.

Maintain MARKET PERFORM with lower TP of RM6.20 (from RM6.80) as we roll forward our valuation base year to average CY18- 19E (from CY18E) and update our earnings estimates for lower applied EPS of 30.4 sen (from 33.3 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. Although long-term prospects remain intact on continued above-average FFB growth and crop diversification efforts, short-term earnings may be impeded by high unit cost and headwinds on CPO prices for the year. As such, we maintain our MARKET PERFORM call on UMCCA.

Source: Kenanga Research - 23 Mar 2018