UMCCA’s 1QFY24 results disappointed as better harvest was more than offset by higher production cost and softer CPO prices realised. The same reasons contributed to a 74% YoY plunge in 1QFY24 core net profit. We cut our FY24-25F net profit by 15% and 18%, respectively, but maintain our asset-based TP of RM5.00 and MARKET PERFORM call.

A weak first quarter. Its 1QFY24 core net profit came in at only 11% and 10% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from higher production cost and softer CPO prices realised.

Although 1QFY24 CNP surged >100% QoQ to RM6.6m, margins were still weak and down by 74% YoY compared to a very strong quarter last year. Its 1QFY24 CPO price which dipped 5% QoQ and 33% YoY was the main cause of margins staying tight but production cost was also higher than expected even though FFB production actually improved QoQ as well as YoY. Therefore, its margins stayed compressed, with PBT margin for 1QFY24 at only 3%, a third of UMCCA”s 10-year average. Encouragingly, the group’s Indonesian operation is maturing well with 1QFY24 registering a RM2m pre-tax profit compared to losses a year ago as well as in 4QFY23. 1QFY24 Indonesian FFB harvest of 27K MT was 55% higher QoQ and up by 155% YoY, helping to offset the softness in CPO prices. However, the group turned from RM10m net cash a quarter ago to RM13m net debt (0.9% net gearing) in 1QFY24 due largely to a RM16m jump in inventory, from RM36m in 4QFY23 to RM52m in 1QFY24. No DPS was declared, which in line with our expectation.

Rangebound CPO prices likely for FY24-25. A fragile supply-demand edible oil outlook for 2023-24 suggests a volatile trading environment ahead with little room to absorb negative news, be it poorer-than expected weather such as a severe El Nino or an unexpected disruption in supply chain such as lower river levels making exports difficult or surging freight charges. We are raising average CPO price back to RM3,800 per MT from RM3,700 for FY24-25 on the back of higher risk premium for palm oil in light of the pending El Nino, which is now almost certain, just a matter of severity. Specifically, should current expectation of a “strong” El Nino turn to “very strong,” even higher CPO prices cannot be dismissed.

Forecasts. We cut our FY24-25F net profit by 15-18% to reflect the higher production cost in 1QFY23. Its production cost should ease moving ahead as fertiliser prices have fallen by about 30% YoY and seasonally higher harvest is due in 2QFY24. Nonetheless, we keep our NDPS of 12.0 sen annually.

We also keep our TP of RM5.00 based on 0.7x P/NTA which is based on smaller plantation group average of 0.8x over a 3-year to 15-year basis, essentially over a medium to long term commodity cycle basis. However, an additional 10% discount is applied against 0.8x P/NTA for UMCCA in view of the group’s weak ROE in the past. There is no change to our TP based on its 3-star ESG rating as appraised by us (see Page 3). Maintain MARKET PERFORM.

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

Source: Kenanga Research - 25 Sept 2023