We recently came away from a meeting with UMCCA’s management NEUTRAL on its FY20 prospects. The positive impact on earnings from sturdy FY20 FFB growth of 15% (vs. ours of 11%) and higher CPO prices (QTD 3QFY20: +29%) should be partially mitigated by more aggressive manuring target (67%) in 2HFY20. Meanwhile, management expects CPO price to average RM2,800/MT in 2020 (in line with our RM2,700/MT estimate). No changes to earnings estimate. Maintain MARKET PERFORM with an unchanged Target Price of RM5.55 (mean).

Sturdy FY20 FFB growth. Management is expecting overall FY20 FFB growth of 15%, driven by Indonesia (20-25% growth) due to improving yields from its plantation’s young age profile. This translates into FY20E FFB production of 406k MT (vs. our 392k MT; +11% YoY). Having said that, we are keeping our FY20 FFB forecast unchanged for now, in anticipation of a slower pick-up in 2HFY20.

Improving CPO price outlook. Management expects CPO price to average RM2,800/MT in 2020 (in line with our CY20 forecast of RM2,700/MT) as: (i) production should be affected by the dry weather, lower fertiliser application and lower replanting activities during the period of depressed CPO price environment, while (ii) demand seen to remain robust with the implementation of biodiesel mandate in Indonesia (B30). While the outlook for CPO price remains encouraging in our view, we note that the group’s realised CPO prices could be slightly lower given Indonesia’ USD50/MT export levy.

Cost remains challenging in FY20. We understand that management intends to apply RM1,400/Ha of fertiliser for FY20 (1HFY20: c.RM460/Ha). Despite more aggressive manuring in 2HFY20, management expects FY20 CPO production cost to remain around c.RM2,100/MT (vs. our RM2,200/MT) as production increases. Nevertheless, we believe c.RM2,100/MT could be 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 (67%) in 2HFY20. As such, this should partially offset the increase in FFB output and higher CPO price (QTD 3QFY20: +29%).

No changes to FY20-21E earnings as updates are consistent with expectations.

Maintain MARKET PERFORM with an unchanged Target Price of RM5.55 based on an unchanged Fwd. PBV of 0.70x applied to CY20E BV/share of RM7.93, reflecting mean valuation, justified by: (i) its higher production cost (1HFY20: RM2,100/MT; vs. peers’ RM1,800/MT), and (ii) its FY20 results which is likely to remain in losses. Valuations of other planters under our coverage are pegged at mean to +1.0SD levels

Source: Kenanga Research - 14 Jan 2020