We came away from IJMPLNT’s analysts’ briefing feeling cautiously optimistic about its prospects. We have gathered that an earlier shortage of barges in Indonesia has mostly eased. In FY20, production yields are expected to improve as c.1,000 Ha comes into maturity. Unit production cost in FY20 is likely to ease on higher yields in Indonesia. No changes in FY19-20E CNPs of RM13.6-73.7m. Maintain MARKET PERFORM with an unchanged TP of RM1.50.

Shortage of barges easing. We have gathered that an earlier shortage of barges in Indonesia has mostly eased since mid-December 2018, as the country’s production has tapered off on seasonality and fuel prices have declined. As such, management does not expect any supply disruptions in 4Q19, but has noted the risk of encountering the same problem again if production picks up in 2HCY19.

Production on track to surpass 1m mark in FY20. We understand that production in the Sugut region, which accounts for about two-third of Sabah’s output, still saw some lagged impact of El Nino in FY19. Management expects production in the region to fully recover by mid- FY20, and has conservatively guided for a FFB yield of 20MT/Ha for Malaysia in FY20 (vs. c.19MT/Ha in FY19). For Indonesia, FFB yield is expected to improve from c.17MT/ha in FY19 to 20MT/Ha in FY20. Overall, this translates into 23% growth in FFB output to 1.22m MT in FY20. However, we are keeping our conservative forecast of 1.13m MT (+13%) to account for the risk of further barges shortage in 2HCY19. In FY20, c.1,000 Ha of planted acreage is projected to come into maturity.

Unit cost to ease on higher yields. As Indonesia’s production yield improves, unit cost of production is expected to ease from RM2,100- 2,200/MT in FY19 to RM1,900/MT in FY20. On the other hand, unit cost in Malaysia is likely to edge up from RM1,800/MT in FY19 to RM1,900/MT in FY20 due to higher fertiliser cost and full-year impact of a minimum wage increase – which raises labour cost by an estimated RM4m in FY20. Overall, the group’s blended cost of production is projected to drop by 5% from c.RM2,000/MT in FY19 to RM1,900/MT in FY20.

CPO price expected to improve. Management believes RM2,400/MT is a realistic CPO price target for CY19. This represents a 7% improvement from CY18, in line with our forecast. It is estimated that every RM100/MT change in CPO prices would translate into an earnings impact of RM20m in FY20.

No changes in FY19-20E CNP of RM13.6-73.7m as production recovery and cost improvements have been factored into our earnings projections.

Maintain MARKET PERFORM with an unchanged TP of RM1.50 based on PBV of 0.75x applied to CY19E BV/share of RM2.02. This reflects -2.0SD below mean, considering the group turned into losses in 2Q19 and is expected to remain in the red in 3Q19 due to depressed CPO prices during the quarter. However, we maintain our MARKET PERFORM call as the company’s CY19E FFB production outlook is sturdy at +12% (vs. peer average of 5%) and earnings are expected to improve in FY20 as cost of production declines. We may re-look at our call if its outlook starts to improve post-3Q19 results.

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

Source: Kenanga Research - 16 Jan 2019