9M19 CNL of RM22.9m missed our CNL forecast of RM11.5m and consensus’ RM0.6m, largely due to weaker-than- expected FFB output and lower-than-expected average CPO price. YoY, 9M19 CNL of RM22.9 was the reverse of RM22.9m CNP in 9M18. QoQ, 3Q19 CNL narrowed to RM3.3m from RM6.0m in 2Q19. No dividend was announced, as expected. Widen FY19E CNL by 144% and reduce FY20E CNP by 37%. Maintain UP with a lower TP of RM5.00.

Sixth miss. United Malacca Berhad (UMCCA)’s 9M19 core net loss (CNL*) of RM22.9m missed our FY19E CNL of RM11.5m and consensus’ RM0.6m, marking the sixth consecutive quarter of earnings disappointment. We believe this largely stemmed from lower-than- expected FFB production of 257k MT (-11% YoY), accounting for merely 72% of our FY19E forecast of 357k MT (-6% YoY). Based on a 5-year historical observation, 9M FFB production constituted 78% of full-year output, on average. Apart from FFB, the average CPO price of RM2,104/MT in 9M19 is also slightly below our RM2,150/MT assumption. No dividend was announced, as expected.

Double whammy of soft CPO prices and weak production. YoY, 9M19 dove into the red with a CNL of RM22.9m, a mirror image of a core net profit (CNP) of RM22.9m in 9M18, as top-line contracted 32%. This was precipitated by a 21% plunge in average CPO price to RM2,104/MT and a 17% decline in Malaysian FFB output to 230k MT due to lacklustre production from old trees in Sabah, albeit cushioned by a 38% increase in Indonesia FFB output to 28k MT. Coupled with higher unit costs, the group recorded a Loss Before Tax (LBT) of RM31.0m (PBT margin: -21%) as opposed to a PBT of RM31.1m (PBT margin: 14%). 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 RM13.4m (PBT margin: -9%) vs. a PBT of RM50.1m (PBT margin: 23%) in 9M18. QoQ, 3Q19 CNL narrowed to RM3.3m from RM6.0m in 2Q19 as a 25% increase in FFB output (to 108k MT), outweighing a 12% decline in CPO price (to RM1,892/MT). On another positive note, 3Q19 EBIT has turned into the black given the sequential pickup in output.

New mill expansion. The group is adding one palm oil mill in Indonesia with a FFB processing capacity of 45MT/hour, which is slated to commence in May 2019. This will expand its total milling capacity by c.56% to 125MT/hour, from 80MT/hour currently. Although its Indonesian FFB output can only fill up c.15% of the new mill’s capacity, we note that the group can source external FFB from neighbouring estates to improve utilisation. By conservatively assuming an oil extraction rate (OER) of 18% and utilisation rate of 30% in FY20, we estimate that the new mill can contribute an additional in RM27m revenue (10% of FY20 revenue) in the next financial year, although we expect slight losses from the plant due to initial under-utilisation.

Widen FY19E CNL by 144% to RM28.2m as we cut our FY19E FFB production by 4% from 357k MT (-6% YoY) to 343k MT (-10%) and average FY19E CPO price by 5% from RM2,150/MT to RM2,050/MT; while FY20E CNP is reduced by 37% (low-base effect) to RM0.9m due to housekeeping.

Maintain UNDERPERFORM (UP) with a lower TP of RM5.00 (from RM5.10) based on an unchanged Fwd. PBV of 0.61x applied to lower CY19E BV/share of RM8.21 (from RM8.37). The Fwd. PBV is based on a very steep -3.0SD from the historical mean (universe range: -1.5SD to 3.0SD), given that the company has disappointed expectations six quarters in a row, and near-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 - 22 Mar 2019