1HFY23 results missed expectations. Stronger YoY fruit output was offset by weaker CPO prices. Forward earnings are likely to remain muted on flattish CPO prices and cost pressures. We cut our FY23F and FY24F earnings by 15% and 12%, respectively, reduce our TP by 6% to RM5.00 (from RM5.30) but maintain our MARKET PERFORM recommendation as 0.8x prospective PBV suggests that much bad news is already priced in..

1HFY23 core net profit of RM42.9m came in at 42% and 44% of our full-year forecast and consensus full-year estimate, respectively. However, we deemed the results as below expectation, expecting weaker earnings ahead. The variance against our forecast came largely from higher operating cost, particularly that of labour and fertilizer.

Historically, UMCCA’s harvest typically peaks in the second quarter (Aug-Oct). However, stronger QoQ 2QFY23 production of 115.6k MT (+25% QoQ, -11% YoY) was not enough to counter the dampening effects of softer CPO price of RM3,985/MT (-29% QoQ, -8% YoY). Cost is estimated to have risen by over 30% YoY due to higher labour, fertiliser and transport costs. Nevertheless, earnings and cashflows remained healthy. However, after paying RM21m of dividends for end-FY22 period in Aug 2022, group’s RM40m net cash a quarter ago turned RM12m net borrowing but net gearing is negligible at below 1%.

Softer upstream outlook ahead. Palm oil prices have fallen by over 30% since June on recovering edible oil supply. However, the overall supply-demand balance moving into CY23 looks fragile. This is because demand is likely to rebound after a rare flattening of the normal uptrend curve caused by Covid-19 since 2020. High palm oil prices also muted sales in 1HCY22. Therefore, the need to restock plus ongoing movement relaxation and economies reopening should offset pending slowdown arising from any economic headwind in sight. China, a big edible oil market, is only starting to adjust back to a new post Covid normal which should provide some support going in into the year 2023. Demand for biofuels has also been strong thanks to elevated fossil fuel prices. US biofuel consumption has risen while Indonesia is planning to raise its biofuel utilisation level from B30 to B35 effective Jan 2023 while Brazil is considering likewise sometime in 2023 as well.

We are maintaining CPO price assumption at RM4,000 per MT for FY23 and RM3,800 for FY24. However, we are adjusting down FY23F and FY24F core EPS, from 48.2 sen to 41.1 sen and from 40.5 sen to 35.6 sen, respectively, on higher labour and fertiliser costs. Maintain FY23F/FY24F NDPS of 15.0 sen each.

Maintain recommendation at MARKET PERFORM but toning down our TP from RM5.30 to RM5.00 based on: (i) weaker revised FY23F core EPS, (ii) 20% discount to integrated target PER of 15x, and (iii) prospective PBV that is already trading at 0.8x which suggests that much bad news is already reflected in the share price. 3-star ESG rating for the group is at sector average.

Risks to our call include: (i) adverse weather, (ii) softer CPO prices, and (iii) rising cost of labour, fertiliser and fuel.

Source: Kenanga Research - 28 Dec 2022