FY19 CNL of RM33.8m came below our/consensus’ CNL forecast (116%/159%) of RM29.1m/RM21.2m due to lowerthan-expected average CPO price. 6.0 sen dividend declared was a positive surprise as we expected less amidst losses. Widen FY20E CNL by 4% to RM18.4m and introduce FY21E CNL of RM6.8m. Maintain UP with an unchanged TP of RM4.90.

FY19 below expectations. FY19 CNL* at RM33.8m was 116%/159% of our/consensus’ FY19E CNL of RM29.1m/RM21.2m. The negative deviation stemmed from lower-than-expected CPO price and PK price of RM2,071/MT and RM1,481/MT (vs. our FY19E assumption of RM2,100/MT and RM1,700/MT). Meanwhile, FFB output of 354k MT came within our assumption at 103%. A 6.0 sen dividend declared was a positive surprise, bringing FY19 DPS to 8.0 sen vs. our assumption of 4.0 sen as we expected a lower quantum amidst losses.

Dragged by soft CPO prices and weak production. YoY, FY19 registered CNL of RM33.8m (vs. FY18’s CNP of RM23.6m), dragged by: (i) weaker average CPO prices (-21%) to RM2,071/MT, (ii) lower average PK prices (-36%) to RM1,481/MT, (iii) softer FFB output (-7%) due to lower productivity of old palm trees in Sabah and (iv) stubbornly high maintenance costs from young trees in Indonesia. QoQ, despite higher average CPO prices (+6%), 4Q19 CNL widened (240%) to RM11.1m (from 3Q19 CNL of RM3.3m) as FFB output fell (-11%) on seasonality. This was exacerbated by decline in PK prices (-10%).

New mill has commenced. The group’s new palm oil mill in Indonesia with FFB processing capacity of 45MT/hour, has commenced in June- 2019. This is expected to expand its total milling capacity by c.56% to 125MT/hour. By conservatively assuming an oil extraction rate (OER) of 17% and utilisation rate of 25% in FY20, we estimate that the new mill could contribute an additional in RM16m revenue in FY20. Nevertheless, we expect slight losses from the plant due to initial under-utilisation.

Widen FY20E CNL by 4% to RM18.4m (low base effect) as we tweaked our FFB output (+3%) to 376k MT, implying YoY growth of 6% (previously 7%) due to housekeeping, while introducing FY21E CNL of RM6.8m. We also adjusted our FY20E DPS higher to 6.0 sen (previously 4.0 sen).

Maintain UNDERPERFORM with an unchanged Target Price of RM4.90 based on an unchanged Fwd. PBV of 0.62x applied to CY20E BV/share of RM7.89. The Fwd. PBV is based on steep -2.0SD from the historical mean (universe range: -2.0SD to 1.0SD), given that the company has disappointed expectations seven 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 - 27 Jun 2019