We visited IJMPLNT’s Desa Talisai estate and mill in Sandakan, Sabah. We came away reassured that its negative outlook is abating as the issue of a shortage of barges is easing and CPO price is likely to recover post- December. We opine that IJMPLNT should increase mechanisation to improve efficiency. No changes in FY19- 20E CNPs of RM52.1-93.1m. Maintain MARKET PERFORM with an unchanged TP of RM1.85.

Outlook still unexciting, but improving. We visited IJMPLNT’s Desa Talisai estate and mill in Sandakan, Sabah. We were accompanied by Mr. Lee Hock Leang - General Manager, and En.Hafin - Estate Manager. During the visit, we were given a comprehensive walk- through of the estate and mill operations. We came away reassured that its negative outlook is abating mainly because the issue of a shortage of barges is easing and CPO price is likely to recover post- December.

Shortage of barges easing. IJMPLNT’s FFB harvesting and CPO production activities in East Kalimantan, Indonesia, have recently been curbed by a shortage of barges. This has, in turn, resulted in lower delivery of CPO to refineries, filling oil storage tanks to the brim. In October, IJMPLNT only produced 19.1k MT of CPO, compared to an average of 22.1k MT during the same month of the past three years. Nevertheless, management said that the shortage issue is easing and should be resolved by 1QCY19, which we have factored this into our earnings estimates (please refer to our sector update on 5 Nov 2018).

Still plenty of room for mechanisation. Currently, only selected areas and a small portion of the Desa Talisai estate are mechanised, as the estate is filled with mostly hilly terrains, making it difficult for mechanical equipment like grabbers and motorised wheelbarrows to navigate around. While the group does continue to envision further mechanisation in its estate operations over the long term, management also highlighted challenges vis-à-vis training existing workers or hiring experienced workers to use mechanical equipment.

Sanguine about future prospects. IJMPLNT’s FFB production is likely to peak in November and begin to plateau from December onwards. Management was hopeful that CPO price has bottomed out considering that the current price of RM1,746/MT has already fallen below smallholders’ cost of production of c.RM2,000/MT and around its own production cost of RM1,700-1,800/MT. Management also believes that CPO demand from India would rise over the long term as the nation’s middle-income group grows larger. Meanwhile, we learned that the impact from a nationwide increase of minimum wage to RM1,100/month is minimal, as all workers are already receiving RM1,500/month and above.

No changes in FY19-20E CNP of RM52.1-93.1m as we believe CPO price will recover post-December on seasonal production slowdown.

Maintain MARKET PERFORM with an unchanged TP of RM1.85 based on PBV of 0.90x applied to CY19E EPS of 2.05 sen, reflecting - 2.0SD below mean. While the company’s CY19E FFB production outlook is sturdy at +12% (vs. peer average of 5%), we continue to expect high production costs to eat into profit margins in the near-term due to full overhead charges on very young estates in Indonesia.

Risks to our call include sharp rises/falls in CPO prices and a precipitous rise in labour/fertiliser/transportation cost.

Source: Kenanga Research - 19 Nov 2018