Kenanga Research & Investment

United Malacca - A Soft Patch in 3QFY23

Publish date: Tue, 28 Mar 2023, 09:11 AM

UMCCA’s 9MFY23 results disappointed due to higher production costs. QoQ, realised 3QFY23 CPO prices were marginally firmer and FFB harvest was also stronger-than-usual which is likely to repeat moving into FY24 but so will the high production costs. We downgrade our FY23F net profit by 6% but maintain FY24F numbers, TP of RM5.00 and MARKET PERFORM call. Trading at 0.8x PBV, the market might be overly negative on UMCCA as poor Latin American soybean harvest is supportive of CPO prices staying firm into FY24.

I9MFY23 CNP of RM61.4m came in below expectations at only 71% and 67% of our full-year forecast and the full-year consensus estimate respectively. The variance against our forecast came largely from higher operating cost, particularly labour and fertiliser which are expected to stay elevated. 3QFY23 CNP of RM18.7m was also weaker than expected on higher cost though CPO price was firm QoQ at RM4,035/MT (+2% QoQ, -16% YoY). Third quarter FFB production was better than expected, at 100.7k MT (-1% QoQ, +29% YoY). Usually, UMCCA’s FFB output starts softening after peaking in the second quarter but for 3QFY23 it was essentially flat. The group’s net cash strengthened QoQ, from RM12m net borrowing to net cash of RM8m.

Stabler outlook ahead. Palm oil prices have been trading sideways after correcting in mid-CY22. A recovery albeit a fragile one is taking shape and the likelihood it staying fragile beyond CY23 and into CY24 is rising. South American soyabean harvest is ongoing but looking weaker than expected. Supply should still inch up YoY thanks to record Brazilian production but very poor Argentinean harvest is pointing to a much smaller increment. Consequently, edible oil inventory has less room to absorb any negative surprises. High production cost is another issue faced by palm oil planters but better harvest should provide some stability and coupled with firm CPO prices, margins should be more stable for in the medium-term. Demand for biofuels has been mix, with US biofuel demand expected to rise while Indonesia recently raised its biofuel blend from B30 to B35 and Brazil is doing likewise from B10 to B12 effective next month.

We cut our FY23F net profit by 6% on higher production cost but keep our FY24F numbers. We maintain our average CPO price assumptions of RM4,000 per MT in FY23 and RM3,800 per MT in FY24. Maintain FY23- 24F NDPS of 15.0 sen each.

We maintain our MARKET PERFORM call and TP of RM5.00 after taking into considerations: (i) firm CPO prices extending into CY24, hence our FY24F CEPS is 17% above consensus despite our weaker FY23F CEPS, (ii) 20% discount to integrated target PER of 15x, (iii) prospective PBV that is already trading at 0.8x which suggests that much bad news is already reflected in the share price, and (iv) a net cash balance sheet. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

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 Mar 2023

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