IJM Plantations Berhad (IJMPLNT)’s 1HFY20 CNL of RM7.3m came in way below both our and consensus’ CNP expectations of RM28.3m and RM20.3m, respectively, mainly due to lower-than-expected CPO prices although 1HFY20 FFB output is within at 48%. No dividend was declared, as expected. Reduce FY20-21E CNP by 48-39% on lower CPO price assumption. Downgrade to UNDERPERFORM with an unchanged TP of RM1.65 as we believe most positives have been priced in (extremely stretched 55x CY20E PER). Consensus’ earnings downgrade is also a risk.

Below expectations. 2QFY20 registered CNL* of RM2.3m, bringing 1HFY20 CNL to RM7.3m, way below our and consensus’ CNP forecasts of RM28.3m and RM20.3m, respectively. The deviation mainly stemmed from weaker-than-expected CPO price of RM1,880/MT vs. our FY20 estimate of RM2,175/MT. Meanwhile, 1HFY20 FFB output of 497k MT came within our estimate of 1.03m MT, at 48%. No dividend was declared, as expected.

Plantation lacking steam. YoY, despite an 11% increase in FFB output, 1HFY20 recorded CNL of RM7.3m (vs. CNP of RM5.7m in 1H20) as average CPO price declined (-11%), resulting in EBIT margin compression of (-1.7ppt). QoQ, 2QFY20 CNL shrank 53% to RM2.3m (from RM4.9M in 1QFY20) mainly due to: (i) 15% increase in FFB output, and (ii) positive taxation of RM1.9m (vs. RM0.3m in 1QFY20). Had it not been for the positive taxation, 2QFY20 losses would have been more severe at RM4-5m.

3QFY20 expected to return to the black but positives could already be priced in. We expect 3QFY20 to return to the black on higher CPO prices (QTD 4QCY19: +13%), while FFB growth remains intact. However, we believe the recovery could already be priced in given that the share had already rallied (+32%) since August.

Reduce FY20-21E CNP by 48-39% to RM14.8-33.3m (low base effect) as we lowered our FY20-21E CPO price assumptions to RM2,100-2,300/MT (from RM2,175-2,400/MT), reflecting lower realized CPO prices in Indonesia.

Downgrade to UNDERPERFORM with an unchanged Target Price of RM1.65 based on an unchanged PBV of 0.84x (-0.5SD) applied on CY20E BV/share of RM1.96. Despite the CPO price rally, we believe most positives have already been priced it. At current price, it implies an extremely stretched 55x CY20E PER (partly due to low base earnings), which we believe is unjustified given its: (i) lower-than expected realized CPO prices in Indonesia, (ii) exposure to Indonesia (1HFY20 Indonesia FFB output down 2%), and (iii) the group remains loss making. We highlight here the risk of consensus’ earnings downgrade as current earnings estimate may be on the optimistic side. Our FY20-21E CNP is 27-17% lower than consensus, post adjustment.

Risks to our call include: (i) higher-than-expected CPO price released in Indonesia, and (ii) a precipitous decrease in labour/fertiliser/transportation cost.

Source: Kenanga Research - 27 Nov 2019