1Q19 Core Net Loss (CNL)* of RM12.4m was below expectations compared with our Core Net Profit (CNP) forecast of RM53.0m and consensus’ RM49.9m, due to weaker-than- expected FFB production. No dividend was announced, as expected. We trim FY19-20E CNP by 14-3% as we lower our FY19E FFB forecast by 5% to 409k MT (+7%). Downgrade to UNDERPERFORM with a lower TP of RM5.50 (from RM6.20).

1Q19 below expectations. United Malacca Berhad (UMCCA)’s 1Q19 results came in below expectations with a core net loss (CNL*) of RM12.4m, versus our CNP forecast of RM53.0m and consensus’ RM49.9m. The earnings disappointment stemmed from weaker-than- expected FFB output of 63.8k MT (-24% YoY) in 1Q19, which accounted for a mere 15% of our full-year projection. This was caused by the prolonged wet weather in Sabah and Indonesia, which adversely affected pollination. The company has disappointed four quarters in a row. No dividend was declared during the quarter, as expected.

Double whammy. YoY, 1Q19 CNL widened to RM12.4m from RM0.6m as CPO price trended lower to RM2,354/MT (-13%), aggravated by a 24%/20% drop in Malaysian/Indonesian FFB output to 58.5k/5.4k MT. As a result, top-line shrank 36% while PBT dived into the red from RM1.4m (PBT margin: 2%) to a Loss Before Tax (LBT) of RM20.9m (PBT margin: -52%) on higher unit cost. Additionally, the massive slide in earnings was precipitated by the adoption of the new MFRS Framework, which resulted in higher depreciation expenses. Without the MFRS impact, the LBT would have been less severe at RM14.1m (PBT margin: -35%) vs. a PBT of RM8.7m (PBT margin: 12%) in 1Q18. QoQ, 1Q19 turned from a CNP of RM0.7m to a CNL of RM12.4m as CPO price dipped 4% lower and Malaysian/Indonesian FFB production weakened 30%/35%. This resulted in higher unit cost and LBT widening from RM0.5m to RM20.9m.

Temporary setback. Management expects FFB production to gain positive momentum from Oct-Nov 2018 onwards as the adverse effect of El Nino and La Nina subsides, especially in Sabah. This should ease cost woes and improve earnings in quarters ahead. However, as 1Q19 output only came in at 15% of our forecast, we trim FY19E FFB forecast by 5% to 409k MT (+7%) vs. 430k MT (+13%) previously and management’s guidance of 10-12%. UMCCA has recently completed the acquisition of a 60% interest in PT Wana Rindang Lestari, which holds the license to 59.9k Ha of greenfield production forest in Sulawesi. The land is intended for stevia, coconut, cocoa and coffee plantations. Planting efforts are expected to begin from CY19 onwards. While this presents new areas of growth and diversification benefits for the group, the gestation period for some of the crops could be lengthy, especially for coconut, which is likely to take up to 3-4 years.

Trim FY19-20E CNP by 14-3% to RM45.3-67.1m as we lower our FFB production forecast as noted above.

Downgrade to UNDERPERFORM with lower TP of RM5.50 (from RM6.20) based on lower Fwd. PER of 19.2x (from 20.4x) applied to reduced CY19E EPS of 28.6 sen. The Fwd. PER is based on -0.5 SD from the historical mean (vs. +0.5 previously). While its FFB growth outlook of 7% is still above sector average of 5%, earnings are likely to be impeded by high unit cost and headwinds on CPO prices in the near term. The company has also disappointed four quarters in a row. As such, we downgrade UMCCA to UNDERPERFORM from MARKET PERFORM.

Risks to our call are a sharp recovery in CPO prices and stronger- than-expected FFB production.

Source: Kenanga Research - 27 Sep 2018