1H19 Core Net Loss (CNL)* of RM17.9m was markedly below expectations compared with our Core Net Profit (CNP) forecast of RM45.3m and consensus’ RM30.9m, largely due to lower-than-expected CPO prices and weaker-thanexpected FFB output. Dividend of 2.0 was announced, below expectations. Cut FY19-20E CNP by 128-92%, leading to lower DPS of 4.0-4.0 sen. Maintain UNDERPERFORM with a lower TP of RM4.80

Another miss. United Malacca Berhad (UMCCA)’s 1H19 CNL* of RM17.9m drastically missed our core net profit (CNP) forecast of RM45.3m and consensus’ RM30.9m, marking the fifth consecutive quarter of earnings disappointment. We believe this largely stemmed from lower-than-expected average CPO price of RM2,242/MT (vs. our FY19E assumption of RM2,350/MT) and weaker-than-expected FFB production of 150k MT (-18% YoY), which only accounted for 37% of our full-year projection of 409k MT. Management indicated that production was dragged by old trees in Sabah, where 40% of palms are over 18 years of age. A dividend of 2.0 sen was announced, below our full-year expectation of 13.0 sen. Accordingly, we have revised our FY19-20E dividend from 13.0-19.0 sen to 4.0-4.0 sen in tandem with our earnings cut.

Double whammy of soft CPO prices and weak production. YoY, 1H19 dived into the red with a CNL of RM17.9m vs. CNP of RM14.1m in 1H18 as top-line contracted 38%. This was precipitated by a 17% plunge in average CPO price to RM2,242/MT and a 21% decline in Malaysian FFB output to 133k MT, albeit cushioned by a 22% increase in Indonesia FFB output to 17k MT. Coupled with higher unit costs, the group recorded a Loss Before Tax (LBT) of RM34.3m (PBT margin: - 37%) as opposed to a PBT of RM19.4m (PBT margin: 13%). We note that the massive earnings slide was also a result of the adoption of a new MFRS Framework, which elevated depreciation expenses. Without the MFRS impact, the LBT would have been less severe at RM23.3m (PBT margin: -25%) vs. a PBT of RM26.7m (PBT margin: 18%) in 1H18. QoQ, thanks to higher FFB output (+35% to 86k MT), 2Q19 CNL narrowed to RM5.6m from RM12.4m in 1Q19, outweighing an 8% decline in CPO price to RM2,156/MT.

New ventures may drag earnings. UMCCA has recently completed the acquisition of a 60% interest in PT Wana Rindang Lestari, which holds the license to 59.9k ha of green field production forest in Sulawesi. The land, which is slated to begin planting from CY19 onward, is intended for stevia, coconut, cocoa and coffee plantations. While this presents new areas of growth and diversification benefits for the group, the gestation period for some of the abovementioned crops could be lengthy.

Reversing FY19E CNP lower by 128% to a CNL of RM11.5m while FY20E CNP is reduced by 92% to RM5.1m as we cut our FY19-20E FFB production by 13-11% from 409-438k MT (+7/+7%) to 357-388k MT (-6/+9%) and average FY19E CPO price by 9% from RM2,350/MT to RM2,150/MT.

Maintain UNDERPERFORM with lower TP of RM4.80 (from RM5.25) based on an unchanged Fwd. PBV of 0.61x applied to reduced CY19E BV/share of RM7.88 (from RM8.64). The Fwd. PBV is based on -3.0 SD from the historical mean, given that the company has disappointed five quarters in a row, and medium-term earnings are likely to be impeded by high maintenance costs for young trees in Indonesia.

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

Source: Kenanga Research - 18 Dec 2018