1QFY20 CNP of RM24.3m came within our (31%), but above consensus’ (36%) expectation. 1QFY20 FFB output is also within at 22%. Sequential earnings deterioration anticipated in 2QFY20 on lower CPO prices (QTD 2QFY20: -18%), while risk of adverse weather impact on Indonesia’s production (c.90% of group’s output) remains. No changes to earnings estimate. Despite higher TP of RM0.950 (from RM0.800) on higher rolled over FY21 PBV multiple, it is downgraded to MARKET PERFORM following its strong share price rally (MTD: +31%), while earnings and Indonesia production risks remain.

Within our, but above consensus’, expectation. 1QFY20 Core Net Profit (CNP) came in at RM24.3m (+75% YoY; +286% YoY) which is within our estimate at 31%, but above consensus’ at 36%. 1QFY20 FFB output of 208k MT (+2% YoY) is within our expectation, accounting for 22% (which is also the 5-year average) of full-year estimate. The absence of dividend was as expected.

Results’ highlight. YoY, 1QFY20 CNP rose (+75%) on the back of: (i) higher average CPO price (+36%), and (ii) FFB growth (+2%). This resulted in a 219% increase in plantation segment profit and group EBIT margin expansion (+8.1ppt) to 22.4%. QoQ, higher average CPO price (+16%) overshadowed lower FFB output (-14%), which gave rise to a 286% growth in 1QFY20 CNP.

Earnings to dip in 2QFY20. Premised on lower CPO prices (QTD 2QFY20: -18%), we expect a slight dip in earnings in 2QFY20 as the negative impact from lower CPO price should be cushioned by higher production (Apr 2020 FFB output: +16.3% QoQ; +12.5% YoY). From what we gathered, fertilizer application for 1QFY20 is on track, while 4MFY20 FFB output is up 4.3% YoY, on course to meet management’s previous expectation (8-12%). Having said that, Indonesia’s production decline remains a risk as the country has yet to see a steep decline in output after it experienced dry weather in 3Q19. Note that Indonesia accounts for 90% of the group’s total output.

No changes to earnings estimate as results were in line.

Downgrade to MARKET PERFORM with a higher Target Price of RM0.950 (from RM0.800) based on a higher rolled over FY21E PBV of 0.8x (from 0.68x), reflecting close to -0.5SD from mean. While we believe a valuation re-rating is justified as the risk of unsuccessful biodiesel mandates have been addressed, a downgrade is sound at this juncture given that its share price has already appreciated strongly (MTD: +31%), while: (i) earnings are expected to deteriorate sequentially on lower average CPO price, and (i) risk of adverse weather impact on production in Indonesia (c.90% of group’s output) remains.

Risks to our call include sharp increase/decline in CPO prices and a precipitous rise/fall in labour/fertiliser/transportation costs.

Source: Kenanga Research - 22 May 2020