UMCCA’s FY23 results disappointed as 4Q margins were eroded by high cost. CPO price eased but held reasonably well QoQ, while FFB output actually improved. Cost pressures should ease somewhat moving ahead while CPO price should soften YoY. We cut our FY24F net profit by 16% but maintain our TP of RM5.00 and MARKET PERFORM call.

UMCCA’s FY23 earnings fell short of our estimate and consensus estimated by 11% and 30%, respectively. The variance against our forecast came largely from higher operating costs.

4QFY23 CNP weakened to RM0.4m (-98% QoQ, -99% YoY) even as CPO price held reasonably well QoQ at RM3,999/MT (-2% QoQ, -34% YoY) QoQ. The sharper YoY drop was due to record edible oil prices including CPO’s a year ago. 4QFY23 FFB production of 0.95k MT (-21% QoQ, +17% YoY) was mixed, stronger YoY but declined QoQ due to a weak April 2023 and stronger preceding quarter. Aggregated, the combined 2HFY23 FFB output actually inched up slightly (4%) HoH. UMCCA’s net cash improved QoQ, from RM8m to RM10m net cash for 4QFY23. A final DPS of 7.0 sen was declared, which brings the full-year DPS to 12.0 sen, 20% lower than our expectation but still decent.

Unless El Nino is severe, flattish CPO prices is more likely. The recent CPO price weakness was due to improving edible oil supply globally but also slower palm oil imports from India and China after re stocking activities in the preceding months. We are toning down UMCCA’s FY24-25F CPO prices slightly, from RM3,800 to RM3,700 per MT. However, firmer prices cannot be ruled out as El Nino is almost certain and FFB yields can be hampered by a serious El Nino event, though the severity this time is still unclear. Edible oil demand is also recovering as buyers take opportunities to stock up on the softer prices while post-Covid normalisation is still ongoing in China and biodiesel production has remained robust. Rising production cost is also looking to plateau over the next 3-6 months as fertiliser and energy costs ease even though wages are still inching up. Altogether, compared to FY23, lower but still decent earnings are expected for FY24-25. However, if the El Nino this time around is serious, stronger CPO prices can lift earnings once again.

We cut our FY24F net profit by 16% on softer CPO price coupled with higher production cost and introduce our FY25F numbers. We reduce our FY24F NDPS from 15.0 sen to 12.0 sen and project 12.0 sen for FY25, in line with the dividend payout in FY23.

However, we keep our TP of RM5.00 after taking into considerations: (i) firm CPO prices extending into 2024, (ii) 20% discount to integrated target PER of 15x, but most importantly, (iii) prospective PBV of 0.8x which suggests that most of the bad news is already reflected in the share price as the sector is generally trading at PBV level at the moment. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). Maintain MARKET PERFORM.

Risks to our call include: (i) oversupply of global edible oils hurting CPO prices, (ii) the suspension of sustainability certification, and (iii) rising cost of labour, fertiliser and fuel.

Source: Kenanga Research - 30 Jun 2023