IJM Plantations Berhad (IJMPLNT)’s FY18 CNP of RM70.3m came in within expectations, at 104% and 98% of consensus and our forecast, respectively. A final full-year dividend of 5.0 sen was announced, higher than our expected 4.1 sen. No change to FY19E CNP of RM81.3m as we introduce FY20E CNP of RM102.8m. Maintain UNDERPERFORM with unchanged TP of RM2.00.

FY18 meets expectations. FY18 CNP of RM70.3m is in line with consensus’ RM67.9m forecast at 104%, and met our RM71.5m estimate at 98%. Note that full-year CNP excludes total unrealized forex loss of RM23.7m. FFB production at 933k metric tons (MT) is also in line at 103% of our forecasted 903k. A final full-year dividend of 5.0 sen was announced, slightly over our 4.1 sen estimate and implying a dividend payout ratio of 94% with a dividend yield of 2.2%.

Weak price impact. YoY, CNP weakened 38% to RM70.3m as CPO prices weakened 4% and PK prices dropped 17%. This resulted in lower Malaysia PBT contribution of 39% and Indonesian core PBT (ex- forex) of RM21.2m (-42%). Despite higher FFB production (+8%) led by Indonesian production, which jumped 16% to 462k MT, the region saw weaker performance given the young average age of the trees (c.5.5 years), explaining higher unit costs. QoQ, CNP improved 51% mainly on tax refunds (RM3.9m tax credit), compared to the extraordinarily high tax rate of 73% in the previous quarter. Otherwise, both Malaysia and Indonesia saw lower PBT on lower CPO price (-5%), PKO price (- 17%) and seasonally lower FFB production (-6%). Given these factors, Malaysia PBT halved (-54%), while Indonesian recorded core LBT of RM3.3m (from RM1.1m in 3Q18).

Growing pains. Management reiterated that its Indonesian operations continued to be affected by “start-up yields whilst incurring full plantation maintenance costs and overheads”, leading to thinner margins in its overseas business. Nevertheless, production should continue trending up, with double-digit growth in Indonesia to push group production beyond the 1.0m MT landmark (+11% in our estimate). Accordingly, we expect the cost structure improvement to lead to a better earnings outlook in FY20.

Maintain FY19E CNP at RM81.3m as we introduce FY20E CNP of RM102.8m representing earnings growth of 26.5%. FY19-20E FFB growth is expected to be slightly above-average at 11-11% (compared to 8-8% sector average).

Reiterate UNDERPERFORM with unchanged TP of RM2.00 based on Fwd. PER of 21.5x applied to FY19E EPS of 9.2 sen. Our Fwd. PER of 21.5x is based on the mean valuation basis. Despite a decent longer-term production outlook, we continue to expect flat short-term production growth – especially in the typically slow 1Q - 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 - 31 May 2018