UMCCA's 1HFY25 results beat expectations as 2QFY25 core net profit (CNP) rose strongly for yet another quarter from better harvest, firmer CPO prices and easier costs. 2HFY25 earnings are expected to remain positive as robust palm oil prices tempers rising minimum wages in the quarters ahead. FY25 CNP is nudged up 7% but we are keeping our FY26F CNP, TP of RM6.30 and OUTPERFORM call intact.

1HFY25 CNP came in at 62% of Kenanga's and 68% of consensus full- year estimates or 7−17% above ours and market forecasts respectively.

Our 1HFY25 CNP excludes RM6.5m of forex loss, and fair value gains of RM3.4m from reported net profit. YoY, 1HFY25 turnover jumped 24% on better FFB production (+7%) and CPO price (+9%), leading PBT margins to almost double YoY from 9% last 1H to 17% in 1HFY25.

2QFY25 revenue strengthened QoQ and YoY on better FFB harvest of 122,639MT (+8% QoQ, +4% YoY) and firmer CPO price of RM4,024 per MT (+3% QoQ, +10% YoY) while input cost stayed muted, resulting in a PBT margin expansion to 23% in 2QFY25, up from, 14% a year ago and 11% a quarter ago.

A 1H dividend of 5.0 sen (flat YoY) was declared in Nov. We are keeping our full-year FY25−26 DPS at 12.0 sen. Group net cash holding continued to improve QoQ, from RM48m in 1Q to RM80m in 2QFY25.

Timely Indonesian recovery. After suffering losses in 1QFY25 due to unusually poor yields, the Indonesian operations reverted into profits again in 2Q thanks to: (a) recovering yields after earlier floods affected operations, (b) larger planted area, up from about 8K ha to about 11K ha YoY, and (c) improving FFB yields as a third of its Indonesian area are still maturing into higher yielding age-bracket. With an average age of 10-year, the Indonesian operations will be key in nudging group profits moving forward as UMCCA embarks on replanting about a third of its Malaysian estates (17-year average age) over the next 3−5 years.

Robust margins for the rest of FY25 likely. Underpinned by the prospect of another year of global edible oil deficit hence declining inventory, UMCCA should be able to enjoy average CPO price of around RM4,000 per MT over FY25−26F. Unit CPO cost should also ease slightly as improving FFB output (notably from recovering Indonesia yields) and firm PK prices help offset higher minimum wages in Malaysia (13.3%) and Indonesia (6.5%).

Forecasts. No change to FY26 CNP but we are upgrading FY25 CNP by 7% to RM81.9m in view of the strong 1H and firm CPO price outlook.

Valuations. We keep our TP of RM6.30 unchanged based on 0.9x P/NTA. Our valuation basis for UMCCA is in line with the historical P/NTA range of 0.9x to 1.1x for smaller planters, which is also at a 10% discount to its NTA to reflect its historically weak ROE. There is no change to our TP based on its 3-star ESG rating as appraised by us (see Page 3). Maintain OUTPERFORM as we see value in the current level.

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

Source: Kenanga Research - 20 Dec 2024