We came away from a recent meeting with UMCCA’s management feeling more optimistic on its long-term prospects. Further upside to our FY21-22E FFB growth is the key positive takeaway. CY21E CPO price is seen at RM2,800-3,100/MT, with FY21E production cost at c.RM1,800/MT. Forward sales (50% monthly production up to June 2021) could cap realised 4QFY21 CPO price at RM3,000-3,100/MT. Raise FY21-22E earnings by 21-31% on higher FFB and realised CPO prices. Higher TP of RM5.30 (from RM5.25) based on 0.8x CY21E PBV (mean), but still a MARKET PERFORM.

Solid FY21-22E FFB growth. Management is expecting FY21-22 FFB growth of 12-15%/10-12% (vs. our estimates of +10%/+4%), driven by abundant rainfall and better yields from its Indonesia estates as its young age profile improves. The upside to our FFB growth estimate is the key positive takeaway. Note that 8MFY21 FFB output for its Malaysia estates has increased 11% YoY, while we expect the downtrend in production to reverse in the coming months.

CPO price outlook. Management expects CPO price to average RM2,800- 3,100/MT in 2021, with prices to trend lower in 2HCY21, alongside seasonally higher production period. This suggests upside to our pre-adjusted CY21 forecast of RM2,600/MT. From what we understand, the group has locked in forward sales for 50% of monthly production (up to June 2021) at a price of c.RM3,000/MT. As a result, we believe 4QFY21 (Feb-Apr 2021) realised CPO price could be capped at RM3,000-3,100/MT (vs. futures-implied level of c.RM3,600/MT).

Improvement in CPO production cost. Management expects FY21 CPO production cost of c.RM1,800/MT (similar to our c.RM1,900/MT), an improvement compared to the estimated FY20 CPO production cost of c.RM2,100-2,200/MT attributable to higher production. Fertiliser costs should remain relatively stable as the group intends to apply RM1,200-1,400/Ha of fertiliser for FY21 (similar to FY20’s RM1,400/Ha), while tender for FY22 fertiliser will be called soon. Looking ahead into 3QFY21, we expect sequential earnings improvement as higher CPO price (+24% QoQ) overshadows lower output (QTD 3QFY21: -13% QoQ).

Raise FY21-22E earnings by 21-31% on: (i) higher FY21/22E FFB growth of +13%/+10% (vs. +10%/+4% previously), (ii) higher realised FY21-22E CPO price of RM2,700-2,750/MT (+2%/+5%).

Maintain MARKET PERFORM but with a higher Target Price of RM5.30 (from RM5.25) based on an unchanged CY21E PBV of 0.8x. The Fwd. PBV reflects mean valuation, in line with peers (-0.5SD to mean). At current price, UMCCA is fairly valued – trading at FY22E PER of 20x at the lower end of peers’ 20- 22x, which we believe is justifiable due to its lower FY21-22E ROE of 2- 4% (vs. peer’s c.6%). From this, we reckon earnings improvement has been priced-in, warranting a MARKET PERFORM call.

Source: Kenanga Research - 2 Feb 2021