IJM Plantations Berhad (IJMPLNT)’s 9M19 CNL of RM14.3m came in significantly below our/consensus CNP estimates of RM12.6m/RM5.2m, respectively. No dividend was declared and we no longer expect IJMPLNT to declare dividends for FY19. Reduce FY19-20E CNPs from RM12.6m/RM73.7m to CNL of RM19.8m and CNP of RM61.6m, respectively. Downgrade to UNDERPERFORM with an unchanged Target Price of RM1.50 based on 0.75x CY19E PBV.

Significantly below expectations. 9M19 registered CNL* of RM14.3m, significantly below our estimate (CNP: RM12.6m) and consensus estimate (CNP: RM5.2m). This represents the third consecutive quarter of disappointment, mainly due to lower-than- expected FFB output. 9M19 FFB output of 727k MT was below our expectation at 73% (4Q typically accounts for c.18-22%). Note that we have excluded total unrealised forex losses of RM35.5m in our CNL calculation. No dividend was declared, as usual, given that dividend announcement is normally in 4Q. However, we no longer expect IJMPLNT to declare dividends for FY19 post earnings cut below.

In the red. YoY, 9M19 turned into CNL of RM14.3m as CPO price realised softened 21%, despite a 3% growth in FFB output. Affected by the lingering effect of La Nina in Sugut, Sabah last year, Malaysian FBB output declined by 8% while Indonesian FFB output recorded an encouraging 13% growth. Despite decent growth in Indonesia, higher production costs from full plantation maintenance overheads in Indonesian young estates eroded EBIT margin from 15.2% to -0.9%. QoQ, despite 22% FFB growth, 3Q19 recorded CNL of RM20.0m compared to CNL of RM5.6m previous quarter, on the back of a decline in CPO price realized (-9%) to RM1,817/MT. Together with higher production costs noted above, EBIT margin further declined from -1.9% to -8.9%.

Still challenging in the near term. Management believes RM2,400/MT is a realistic CPO price target for CY19. The group’s long- term prospects remain encouraging as production continues trending up, with solid double-digit growth in Indonesia to push group output beyond the 1.0m MT mark in FY20. Accordingly, we expect cost structure improvements to lead to a better earnings outlook in FY20. We also draw comfort that the group has locked in fertilizer requirements for FY20 at similar rates to FY19, crossing out one of the major cost concerns. However, we are unexcited about IJMPLNT’s near-term prospects amid subdued CPO price environment and would like to see confirmation of consistent earnings recovery.

Lowering earnings. FY19-20E CNPs is reduced from RM12.6m/RM73.7 to CNL of RM19.8m and CNP of RM61.6m, respectively, as we lower our FY19E FFB production expectations by 6%.

Downgrade to UNDERPERFORM (from MARKET PERFORM) with an unchanged Target Price of RM1.50 based on PBV of 0.75x applied on CY19E BV/share of RM2.00** reflecting -2.0SD below the mean which is at the lower end of our universe’s applied valuation range of -1.5SD to -2.5SD. While the company’s CY19E FFB production outlook is sturdy at +16% (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. We believe our downgrade is fair given: (i) share price has already gained 27% YTD, (ii) three consecutive quarters of disappointment, and (iii) FY19 likely to remain in the red.

Source: Kenanga Research - 27 Feb 2019