United Malacca (UMB) reported one its strongest quarterly earnings in recent history. 2QFY22 CNP of RM30.8m was significantly above ours and market expectation thanks to a fortuitous combination of record CPO prices when FFB production was seasonally high. CPO prices have since eased but labour shortages remain and inventory is improving only gradually. We expect only slightly weaker QoQ earnings in 3Q but staying elevated YoY. Raising FY22- 23E CNP by 43%-23% on CPO prices staying buoyant longer than earlier anticipated and raising TP from RM5.20 to RM5.40 at FY22 P/BV of 0.8x but maintain MP as relative valuations are already at or above peers. ESG score is 55%.

Above our expectation. 2QFY22 registered Core Net Profit (CNP) of RM30.8m (+246% YoY, +67% QoQ) or 57% above ours and 63% above consensus’ estimates due to record high CPO prices which mitigated lower than expected FFB output. The 2Q FY22 earnings surged also lifted 1H FY22 profits allowing for a near doubling in interim dividend of 5 sens (3 sens a year ago) being announced.

Results’ highlight. YoY, 2QFY22 CPO price soared 58% to RM4,327/MT (15% QoQ) due to tight oil & fat supply, not only for palm oil but also competing oils such as soya and rapeseed. This production tightness is reflected in UMB’s flat FFB output of 104k MT (1% YoY) for 2Q. QoQ, output improved only 5% despite being a peak fruiting season. Historically, 2Q FFB production can be 10-20% higher than 1Q. Nevertheless, the Indonesian operations reported profits in 2Q FY22 thanks to the strong commodity prices.

Cumulative 6M or 1H FY22 profit after tax of RM56.9 m (CNP RM49.2 m, 387% YoY) were underpinned by average CPO and PK prices of RM4,063 (61% YoY) and 2,624 per MT (81% YoY) respectively. FFB output inched up by 1% YoY to 203k MT for 1H FY22 as matured area expanded very marginally to 24,003 Ha (1% YoY). The strong CPO price also translated to higher 1H FY22 cashflow which helped halved net debt from RM88.7 m (7% net gearing) at the end FY21 in April to RM43.4 m (3% net gearing) as at end October 2021.

Revising up FY22-23E earnings by 43-23% respectively. Although CPO prices have eased from record levels in October 2021, Malaysian palm oil production is still constrained by labour shortages whilst recent heavy rainfall is compounding the issue. Meanwhile the oil & fats market is expecting record soyabean production in the coming season which should ease tightness hence prices are set to normalise over the next 3-6 months. However, until inventory improves, there is little room to absorb bad news from say another lockdown, poor weather or logistical disruptions which might curb supply. As such, the price downside for CPO is expected to be limited for another quarter or so. Accordingly, we have raised estimated average CPO prices for UMB from RM3,700-3,200 to RM4,000-3,200/MT for FY22-23.

Maintain MARKET PERFORM but with a higher TP of RM5.40 (from RM5.20) based on average FY22-23E PE of 16x and mean Fwd. P/BV valuation of 0.8x. However, we are maintaining MP recommendation as peers are trading at or lower valuations which might limit the upside for UMB despite its earnings upgrade. ESG score is 55%.

Risks to our call are stronger/weaker-than-expected CPO prices and higher/lower-than-expected FFB output as well as production costs.

Source: Kenanga Research - 20 Dec 2021