We came away from a meeting with IJM Plantation (IJMP)’s management turning cautious on its near-term prospect. FY21 FFB growth guidance was toned down, which is the key negative takeaway. We believe market has already priced in earnings improvement arising from firm CPO prices. On PER/PBV valuations, IJMP is traded at a 25%/54% premium to its closest peer, despite lower-than-expected FFB growth and high net debt-to-equity of 0.5x. Cut FY21-22E CNP by 16-13% on lower FFB growth. Downgrade to UP (from MP) with a lower TP of RM1.70 (from RM1.75) on a lower rolled-over CY21E PBV of 1.2x (from 1.25x), reflecting -0.5SD.

Unexciting FFB growth prospects. The group is now targeting flat to slight increase for FY21 FFB growth (vs. initial guidance of 5%) dragged by Indonesia (weather-led). From what we understand, heavy rainfall led to a double whammy impact on production in its East Kalimantan estates – harvesting disruptions due to logistics and poor pollination of its fruit bunch, leading to lower OER. This potential downside to our FY21E FFB growth of 5% is a key negative from the meeting.

Downside bias to CPO price. While no guidance on CPO price was provided, management is of the view that it would be difficult to sustain prices at these elevated levels. We concur – our FY21 CPO price forecast remains unchanged at RM2,600/MT. The group has also locked in forward sales for 30% of its production in Malaysia until January 2021, at a favorable price of >RM3,000/MT. The bulk of the increase in CPO price, however, will only be realized in 3QFY21 as Indonesia’s price trails Malaysia’s price by 2-3 weeks. Meanwhile, FY21 CPO production cost is expected to increase slightly on the back of: (i) higher labor cost, and (ii) a 5% increase in overall fertilizer costs, in line with our expected c.RM2,000/MT.

Earnings improvement likely priced-in. Given that 3QCY20-CPO price is 22% higher QoQ, we expect 2QFY21 to register significant sequential earnings improvement. This is likely to continue into 3QFY21 on the back of even higher CPO prices (QTD-4QCY20: +13% QoQ). However, we are of the opinion that the improvement in earnings could already been priced in. This is premised on CY21E PER of 25x (vs. its closest peer’s 20x)

Cut FY21-22E CNP by 16-13% on lower FY21-22E FFB growth of 3-4% (vs. 5- 4% previously) and lower OER of 20.5% (vs.21.5% previously).

Downgrade to UNDERPERFORM with a lower TP of RM1.70 (from RM1.75) based on a lower rolled-over CY21E PBV of 1.2x (from 1.25x), reflecting -0.5SD valuation. At current price, IJMP is trading at a stretched CY21E PBV of 1.31x (54% premium to its closest peer’s PBV of 0.85x). This is despite lower-than- expected FFB growth potential and higher net debt-to-equity ratio of 0.5x (vs. peer’s net cash position).

Risks to our call are: (i) better-than-expected FFB output, (ii) sharp increase in CPO prices, and (iii) a precipitous decline in labor/fertilizer/transportation costs.

Source: Kenanga Research - 18 Nov 2020