1HFY20 CNL of RM29.9m is below our/consensus’ CNL of RM9.0m/RM9.8m due to higher-than-expected CPO production cost of c.RM2,100/MT. 1HFY20 FFB output of 178k MT (+19% YoY) and DPS of 2.0 sen was in-line with our expectations. We think FY20 CPO production cost could creep up to RM2,200/MT on more aggressive manuring in 2HFY20. Widen FY20E CNL (+267%) to RM34.3m and reduce FY21E CNP to CNL of RM5.6m. Maintain MARKET PERFORM with a lower Target Price of RM5.15.

2QFY20 below expectations. 2QFY20 registered Core Net Loss (CNL*) of RM11.6m, which brought 1HFY20 CNL to RM29.9m below our/consensus’ CNL of RM9.0m/RM9.8m. The deviation stemmed from higher-than-expected CPO production cost of c.RM2,100/MT (vs. our expected c.RM1,900/MT), dragged by high unit production cost in Indonesia due to its young age profile and higher manuring cost. Meanwhile, we deemed 1HFY20 FFB output of 178k MT (+19% YoY) within our assumption at 45% as we expect FFB to pick up in subsequent quarters, in-line with management’s view. A first interim dividend of 2.0 sen was declared, in-line with our expectations.

Lacking steam. YoY, 1HFY20 CNL widened (+54%) to RM29.9m (vs. 1HFY19 CNL of RM19.4m) as lower average CPO/PK prices (-10%/- 33%) overshadowed a 19% gain in FFB output. Note that the group registered 1HFY20 EBIT of RM81.8m due to the gains on disposal of its Masjid Tanah Estate and Selandar Estate amounting to RM103.2m. Stripping off this gain on disposal, the group would have registered LBIT of RM21.4m. QoQ, 2QFY20 CNL narrowed (-37%) to RM11.6m (from 1QFY20 CNL of RM18.3m) on the back of: (i) a 6% increase in FFB output, (ii) higher CPO/PK prices (+5%/5%), and (iii) positive taxation of RM0.6m (vs. –RM4.0m in 1QFY20). The impact of higher FFB output and better CPO/PK prices were partially offset by higher manuring cost (2.2x).

Tough for plantation to shine in FY20. We gathered that fertiliser application rate for 1HFY20 is at c.33% and the group intends to apply 100%. With more aggressive manuring in 2HFY20, management expects FY20 CPO production to remain at c.RM2,100/MT. However, we think c.RM2,100/MT is a “best-case scenario” and it is more likely for FY20 production cost to creep up closer to RM2,200/MT from its aggressive manuring target (63%) in 2HFY20. A silver lining is that higher CPO prices (QTD 3QFY20: +24%), should lift earnings in the subsequent quarters though the impact may not be as pronounced. All in-all, we continue to expect the group to remain in the red in FY20.

Reduce FY20-21E earnings estimate. We now expect FY20 losses to widen (+282%) to RM34.3m while we reduced FY21E CNP to CNL of RM5.6m on higher CPO production cost of RM2,200/MT.

Maintain MARKET PERFORM with a lower Target Price of RM5.15 (from RM5.30) based on an unchanged Fwd. PBV of 0.66x applied to CY20E BV/share of RM7.81. The Fwd. PBV is based on -1.0SD from the historical mean (vs. peers’ -0.5SD to mean), reflecting its high production cost and dim turnaround outlook.

Risks to our call are stronger/weaker-than-expected CPO prices and higher/lower-than-expected production costs.

Source: Kenanga Research - 19 Dec 2019