IJM Plantations Berhad (IJMPLNT)’s 1Q20 CNL of RM4.9m came in below both our and consensus’ expectations, mainly due to lower-than-expected CPO prices and FFB output. No dividend was declared, as expected. Reduce FY20-21E CNP by 42-11% to RM8.9-24.6m. Upgrade to MARKET PERFORM with an unchanged Target Price of RM1.40 as most negatives have been priced in and we expect earnings to recover in subsequent quarters.

Below expectations. 1Q20 registered CNL* of RM4.9m, which was below both our and consensus’ CNP forecast of RM15.3m and RM28.6m, respectively. The deviation stemmed from: (i) weaker-than expected CPO prices at RM1,866/MT vs. our CY19E of RM2,000/MT and lower-than-expected FFB, and (ii) lower-than-expected FFB output at 20% of our FY19 forecast of 1.13m MT. No dividend was declared, as expected.

Results highlight. YoY, 3M20 recorded CNL of RM4.9m (vs. CNP of RM11.3m in 3M19) on the back of lower revenue (-27%) as average CPO prices declined (-16%) to RM1,866/MT, which was partially offset by 5% increase in FFB output (Malaysia: +20%; Indonesia: -5%). QoQ, 1Q20 turned to losses (vs. CNP of RM3.8m in 4Q19), attributed to a 7% decline in FFB output (Malaysia: -18%; Indonesia: +4%) due to the festive season in May-June.

Expecting Indonesian FFB output to increase. The group’s long term prospects remain encouraging as production is trending up, with solid double-digit growth in Indonesia to push group output beyond the 1.0m MT mark in FY20. We estimate that the group’s breakeven CPO price to be c.RM1,950/MT and we expect cost structure improvements to lead to a better earnings outlook in FY20. Positively, the group has also locked in fertilizer requirements for FY20 at similar rates to FY19, crossing out one of the major cost concerns.

Reduce FY20-21E CNP by 42-11% to RM8.9-24.6m (low base effect) as we trimmed our slightly bullish FY20-21E FFB output by 9-6% to 1.03-1.08m MT.

Upgrade to MARKET PERFORM with an unchanged Target Price of RM1.40 based on PBV of 0.71x applied on CY20E BV/share of RM1.96. Despite the earnings miss, we believe at current price, most negatives have been priced in and subsequent quarters should see some recoveries in earnings as FFB output picks up. Our PBV reflects - 1.5SD below the mean, which is at the lower-end of our universe’s applied valuation range of -2.0SD to -1.0SD, given that IJMPLNT’s earnings remain patchy and the TP implies a stretched 60x CY20E PER (partly due to low base earnings) even at -1.5SD level.

Risks to our call include: (i) sharp rise/drop in CPO prices, and (ii) a precipitous decrease/increase in labour/fertiliser/transportation cost.

Source: Kenanga Research - 29 Aug 2019