• Peninsular Malaysia-based upstream palm oil firm with c.10.9k ha of planted area
• Rebalanced tree age profile and expanded prime mature area to produce strong yields of above 24MT/ha of FFB
• Solid net cash position making up 40% of market cap; deep value from implied EV/planted ha of <USD8k; potential strong dividend uptick from gains on disposal of investments
• Initiate coverage with BUY, RM9.15 TP

Tidied up plantations show results. Chin Teck Plantations (CTP) is a Peninsular Malaysia-based oil palm plantation player with c.10.9k ha of planted area across estates in the states of Pahang, Kelantan, and Negeri Sembilan. Thanks to its disciplined replanting over the previous decade, its FFB yields are set to rise for two years in row to exceed 24MT/ha in FY18F. Further, these levels are sustainable given its rebalanced tree age profile with an easing average age.

Higher volumes secure core earnings base; sizeable one-off gains to lift FY18F. With heightened yields, CTP’s FFB production levels are expected to rise 23% in FY18F to above 210k MT. This will be sufficient to improve gross margins and maintain its core earnings base despite an expected decline in CPO ASP. FY18F will additionally see a profit boost of c.RM30m from its disposal of investment securities.

Bumper dividend slated for FY18F, high net cash levels leaves options open. We think CTP can produce a bumper dividend in FY18F given its hike in net profit, even if we assume the lower end of its dividend payout ratio range in recent years. This is further supported by its high levels of net cash (RM2.80/share at end-FY17), which makes up 40% of market cap.

Current valuations are unreasonably low. At around 15x core PE (c.7x ex-cash) and 0.9x P/BV, CTP is trading at valuations that are below both its historic mean and those of other plantation players under our coverage. Current valuation also implies an EV/planted ha of

Valuation:

We derive a TP of RM9.15 for CTP using DCF (11% WACC, 0.5% TG). Our forecasts incorporate spot CPO price forecasts of RM2,620/2,600/2,630 per MT for CY18/19/20F.

Key Risks to Our View:

As CTP’s earnings are subject to the selling prices of CPO and PK, any sustained price decrease will reduce forward earnings prospects and thus firm value.

Source: Alliance Research - 25 Jun 2018