UMCCA’s 1HFY24 results disappointed us (but met market expectation) as its production and the easing in cost fell short of our expectation. We cut our FY24-25F net profit forecasts by 14% and 3%, respectively, but maintain our TP of RM5.00 and MARKET PERFORM call.

Its 1HFY24 core net profit (excluding a forex loss of RM7m and a fair value gain of RM2m) missed our forecast at only 40% of our full-year forecast but met market expectation at 50% of the full-year consensus estimate. The variance against our forecast came largely from weakerthan-expected FFB production and a slower-than-expected decline in cost from its Indonesian operations. Nonetheless, its average CPO price realised of RM3,769 per MT for 1HFY24 was within our expectation.

Its 2QFY24 core net profit more than doubled QoQ while EBIT margin expanded from 5% to 16% on seasonally better FFB output. Historically, 2Q harvest made up about 28% and 1H output about 52% of UMCCA’s full-year production. Nonetheless, 2QFY24 FFB output of 0.221m MT (+6% YoY) came in below our estimate as we had expected better production from Indonesia. Likewise, 2QFY24 margins improved but not as much as expected as cost stayed higher. The group’s venture in Indonesia is gradually turning around but 2QFY24 losses surprised us as we had expected some profits. Net debt rose further, from RM13m in the previous quarter to RM30m but net gearing remained very low at 2%. A 5.0 sen interim DPS was declared, in line with our expectation.

Better margins ahead. Global edible oil balance of supply and demand is likely to remain tight in 2024 (potentially till mid-2025) as supply hinges on very good weather while demand is back to 3%-4% YoY trend line growth after Covid-19 disrupted the market for 2-3 years. As such, relatively flat CPO price of RM3,800 per MT is expected over FY24-25 as El Nino has been mild so far. Production cost should ease as well. YTD, fertiliser and fuel spot prices are already 40% lower YoY. Altogether, margins should improve, mitigating a usually slower seasonal harvest for UMCCA during the second half of its financial year.

Forecasts. We downgrade our FY24-25F core net profit forecasts by 14% and 3%, respectively, to reflect the lower-than-expected FFB production and higher-than-expected cost, notably in Indonesia. Nevertheless, unit cost should be lower YoY, as FFB harvest is improving just slower than we had expected. Input costs such as fertiliser and fuel have also declined YoY. FY24-25F annual NDPS of 12.0 sen is maintained though.

Valuations. 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 - 19 Dec 2023