1HFY20 CNP of RM14.3m (+18% YoY) missed both our (37%) and consensus’ (39%) expectations. Negative deviation is due to lower than-expected POME PBT margin of 20% (vs. our expected 22%). However, DPS of 2.0 was a positive surprise. Sequentially, we expect 3QFY20 earnings to pick up on turnaround in plantation segment due to higher CPO prices (QTD3QFY20: +18% QoQ) and higher FFB output. Reduce FY20-21E CNP by 14-7% on lower POME margin of 20-21% (from 22%), but raise FY20-21E DPS to 3.0 sen (from 2.0 sen). As we are ceasing active coverage, the stock is now a NOT RATED with lower price target of RM0.870 (from RM0.930).

Missed expectations. 2QFY20 registered Core Net Profit (CNP) of RM2.0m, bringing 1HFY20 CNP to RM14.3m (+18% YoY) which is below both our (37%) and consensus (39%) expectations. This is due to lower-than-expected POME PBT margin of 20% (vs. our expected 22%). Losses in plantation segment was well within expectations. However, DPS of 2.0 sen was a positive surprise.

2QFY20 dragged by plantation and refinery. YoY, 1HFY20 CNP rose (+18%), mainly due to plantation segmental LBT narrowing (-49%) on higher CPO price (MPOB 1HFY20: +24% YoY) and possibly higher FFB output. However, the group does not publish monthly production data and thus, we are unable to ascertain the group’s 1HFY20 FFB output. QoQ, 2QFY20 CNP tumbled (-84%) as a result of: (i) 63% decline (virus-led) in refinery revenue causing refinery segmental LBT of RM3.2m (vs. PBT of 2.3m in 1QFY20), and (ii) plantation segmental LBT of RM7.5m (vs. PBT of RM0.1m in 1QFY20) due to lower CPO price (MPOB 2QFY20: -15% QoQ).

3QFY20 earnings expected to pick up. Premised on higher CPO prices (QTD3QFY20: +18% QoQ) alongside expectations of higher FFB output, we expect its plantation segment to return to the black in 3QFY20 and for the group’s earnings to pick up sequentially. As of June 2020, outstanding order book for its POME segment stood at RM327m, while its outstanding SPV order-book stood at RM75m.

Reduce FY20-21E CNP by 14-7% on lower POME margin of 20-21% (from 22%). Raise FY20-21E DPS to 3.0 sen (vs. 2.0 sen previously).

Cease coverage. We have opted to cease coverage on the stock for now due to resources reshuffling as well as lack of investors’ interest. Should investors’ interest or its outlook improve, we may resume coverage in the future. Our latest call on the stock is now a NOT RATED (from MARKET PERFORM previously) with a price target of RM0.870 based on FY21E PER of 11.8x, reflecting -1.5SD from mean. This is justified by: (i) subdued POME segment which has yet to clinch any order-book replenishment for FY20, and (ii) the qualified audit opinion for FY19 accounts that may cast a negative perception on the stock.

Source: Kenanga Research - 1 Sept 2020