9MFY22 Core Net Profit (CNP) of RM85.2m exceeded expectations, coming in just 13% and 11% shy of our and consensus’ full-year forecasts thanks mainly to higher palm oil prices. FFB output was flat YoY. 3QFY22 earnings and FFB output were mixed, stronger YoY but lower QoQ. Palm oil prices have been trading at unprecedented levels since the latter half of CY21 and we had expected CPO prices to ease expecting palm oil supply to improve seasonally. However, the Russia-Ukraine conflict is now likely to stretch the current global edible oils and fats supply tightness until CY23. Consequently, we upgrade United Malacca (UMCCA)’s FY22E and FY23E Core EPS by 15% and 86% to 53.8 sen and 51.2 sen, respectively, on CPO prices staying elevated longer. We also revise up our TP from RM5.40 to RM5.90 on PER of 11x, at a 30% discount to CY22- 23 sector PER of 16x and historically weaker ROE but maintain our MARKET PERFORM recommendation.

Above expectations. Robust 3QFY22 CNP of RM31.9m (-9% QoQ, +200% YoY) was underpinned by record CPO prices. UMCCA achieved average CPO price of RM4,851 per MT (+12% QoQ, +57% YoY) in 3QFY22 and RM4,313 (+60% YoY) for 9MFY22. Historically, UMCCA enjoys peak FFB harvest during the 2Q which remained so for FY22. 3QFY22 FFB output weakened 11% QoQ dampening EBIT to RM40.8m (-18% QoQ, +110% YoY). Nevertheless, cashflow was robust. The Group’s financial position strengthened as net debt fell sharply from RM43m (3% net gearing) in 2QFY22 to just RM6m (0.5% net gearing) in 3QFY22. No dividend was declared which is not surprising.

Outlook: Russia and Ukraine are major food producers and exporters including wheat, corn and nearly half the world’s sunflower and its oil. Therefore, the conflict is squeezing already tight global edible oil & fats supply even further. The Ukraine supply chain – from farms to mills, ports and shipping - has been disrupted or damaged. Coupled with lower-than- estimated South America soyabean harvest, the prospects of easier vegetable oil supply in 2022 is dim. Although better oil palm harvest in 2H CY22 along with North American soyabean harvest should help to alleviate matters, it is unlikely to alter the tight supply situation much. As such, while palm oil prices should ease as the seasonally peak months of Sept/Oct approach, the price downside is expected to be limited. Compared to just a month earlier, we are now expecting CPO prices to stay elevated longer. FY22 CPO price is now expected to average RM4,500 per MT versus RM4,000 previously. More importantly, we have raised FY23E CPO price from RM3,200 to RM4,000 to reflect a firmer CPO price outlook stretching beyond CY22.

Accordingly, we upgrade Core EPS estimate from 43.3 sen to 53.8 sen for FY22 and from 27.5 sen to 51.2 sen for FY23. Higher NDPS of 15.0 sen is also expected for FY22-23, up from 10.0 sen in FY21.

We upgrade our TP for UMCCA from RM5.40 to RM5.90 but retain the MARKET PERFORM rating. Compared to similar sized plantation groups (market cap of RM1-3b), UMCCA is already trading at comparable valuations with slightly lower prospective FY22 PER and Price/NTA but also lower dividend yields. UMCCA’s ROE is also weaker than most peers. Larger integrated players are also ahead in terms of ESG disclosures as well as certification.

Risks to our call include: (i) adverse weather, and (ii) softer CPO prices.

Source: Kenanga Research - 23 Mar 2022