IJM Plantations Berhad (IJMPLNT)’s 1Q19 CNP of RM11.3m came in below expectations at 15% and 14% of consensus and our forecast, respectively, due to weaker-than-expected FFB production. No dividend was announced, as expected. We trim FY19-20E CNP by 20-9% to RM65.3-93.1m as we reduce our FFB output forecasts by 10-5% and revise our dividend estimates to 4.0-5.5 sen.Maintain UNDERPERFORM with lower TP of RM1.60.

1Q19 missed expectations. 1Q19 CNP* of RM11.3m missed both consensus’ expectation (RM73.3m) at 15% and our forecast (RM81.3m) at 14% due to weaker-than-expected FFB production (-8% YoY to 221k MT vs. our expectation of 1.03m MT). Note that CNP excludes total unrealized forex loss of RM30.9m. No dividend was declared, as expected.

Hurt by weak CPO price and production. YoY, CNP weakened 8% to RM11.3m as CPO prices softened 13% to RM2,395/MT and PKO prices dropped 20% to RM3,538/MT, exacerbated by an 8% decline in FFB output. This was attributed to the lingering effect of La Nina in Sabah last year and reduced harvesting activities amid an extended Eid-al-Fitr holiday. As a result, Malaysian FFB production was down 22%, partially offset by a 3% increase in Indonesian FFB output. QoQ, CNP tumbled 46% on higher plantation maintenance and overhead costs arising from an increase in young mature areas. In addition, FFB output was 2% lower while CPO price inched down 3% during the quarter.

Growing pains. Management reiterated that its Indonesian operations continue 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 in FY20. Accordingly, we expect the cost structure improvement to lead to a better earnings outlook in FY20. However, we are cognizant that our FFB production assumptions are still on the aggressive front, implying that unit production cost may still be challenging.

Trim FY19-20E CNP by 20-9% to RM65.1-93.1m as we reduce our FFB output forecasts by 10-5%. We now project FFB production to reach 993k MT (+6%) in FY19 and 1.13m MT (+13%) in FY20. We have also trimmed our dividend forecasts to 4.0-5.5 sen from 6.2-6.9 sen following the earnings cut.

Reiterate UNDERPERFORM with lower TP of RM1.60 (from RM2.00) based on Fwd. PER of 21.5x applied to FY19E EPS of 7.4 sen. Our Fwd. PER of 21.5x is based on a mean valuation basis, justified by FY19E FFB growth of 6%, which aligns with the industry average of 5%. Despite a decent longer-term production outlook, we continue to expect high production costs to eat into profit margins in FY19 due to 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 - 29 Aug 2018