Strong volume mitigates weak CPO prices

• FY19 earnings within expectations

• Earnings expected to improve next year on higher CPO prices

• Strong balance sheet; RM3.20 net cash/share

• Maintain BUY with DCF-derived TP of RM8.65

What’s New

Strong production and sales growth mitigated lower CPO prices. Chin Teck Plantations (CTP) posted 4QFY19 net profit of RM6.3m (-6.8% y-o-y, -11.0% q-o-q) and full year core profit of RM31.3m (-17.6% y-o-y). These were within expectations and constituted 98% of our full year forecast. Despite crude palm oil (CPO) prices averaging 9% lower y-oy, production and sales volume were much higher. Operating expenses were mainly higher due to higher opening inventories and an increase in purchase of fresh fruit bunches (FFB). Associates’ contribution reversed from profit to a loss. This was due to losses from investments in palm oil in Indonesia caused by unrest in the villages neighbouring CTP’s estate in the Lampung province. CTP did not declare any final dividend in 4QFY19.

Outlook

Still undervalued with excess cash. CTP’s war chest is still impressive, with cash and bank balances of RM297.4m. It now has net cash per share of RM3.20, approximately 51% of its current share price of RM6.31. The net cash per share of RM3.20 signifies a high floor for its share price. CTP’s net cash position should enable it to withstand any fall in CPO prices. We also expect higher CPO prices next year to boost earnings. Our CPO price forecast currently stands at RM2,090/2,230/2,410 for 2019-21F.

Valuation and recommendation

Maintain BUY with discounted cash flow (DCF)-derived target price (TP) of RM8.65. We remain positive on CTP in view of its commendable FFB and CPO production numbers, as well as decent 4QFY19 performance despite weaker average CPO prices.

Source: Alliance Research - 1 Nov 2019