UMCCA has proposed to dispose of plantation lands measuring 1,021 Ha for a total cash consideration of RM175m. The disposals are slated for completion by 31 March 2019. No change in FY19E CNP, but adjust reported net loss of RM11.5m to net profit of RM76.5m to account for disposal gain and FY20E CNP from RM5.1m to RM1.4m to account for smaller planted area after the sale. Upgrade to MARKET PERFORM with higher TP of RM5.05 (from RM4.80).

Funding for Sulawesi venture. United Malacca Bhd (UMCCA) has entered into 3 separate conditional sale and purchase agreements to dispose of plantation lands in Melaka and Negeri Sembilan, collectively measuring 1,021 Ha (c.3% of UMCCA’s total planted area), for a total cash consideration of RM175m. The sales are slated for completion by 31 March 2019. The announcement came as no surprise as the group had previously indicated its intention to sell plantation assets in the area to fund its Sulawesi venture.

Unlocking value. The sales consideration translates into a price/planted Ha of c.RM171,533, which we believe is a good price compared with TH Plantations’ sale of its Negeri Sembilan plantation assets at c.RM62,142/planted Ha in Nov 2016. The premium could be due to the superior age profile of UMCCA’s plantation assets (>13 years) vs. TH Plantations’ >21 years. Following the exercise, the group is expected to turn from a net gearing position of 0.08x to a net cash position of RM56m. We are positive on the announcement as the exercise allows the group to unlock value of the plantation assets during this uncertain time.

New ventures m drag earnings. Recall that 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.

No change in FY19E CNP as the sale is only expected to be completed in 31 March 2019, but we adjusted reported net loss of RM11.5m to a net profit of RM76.5m to account for an expected net disposal gain of RM88m and FY20E CNP from RM5.1m to RM1.4m as we revised our FY20E FFB production from 388k MT to 365k MT to account for smaller planted area after the sale. Additionally, we have raised our FY19-20E BVPS from RM7.89-7.88 to RM8.31-8.28 as the sale would unlock the market value of the plantation assets.

Upgrade to MARKET PERFORM with higher TP of RM5.05 (from RM4.80) based on an unchanged Fwd. PBV of 0.61x applied to higher CY19E BV/share of RM8.29 (from RM7.88). The Fwd. PBV is based on -3.0SD from the historical mean, given that the company has disappointed expectations five quarters in a row, and medium-term earnings are likely to be impeded by high maintenance costs for young trees in Indonesia. However, at this price level, we believe the negatives have been priced in.

Risks to our call are sharp rises/falls in CPO prices and higher-thanexpected labour / fertiliser / transportation costs.

Source: Kenanga Research - 4 Jan 2019