Growth in profits through higher CPO prices. We believe that the recent trend in CPO prices would continue into FY20 due to plateauing palm oil supply on the back of the dissipation in production yields, supply disruption coming from El Nino and stronger soybean prices. We upgrade our CPO price assumptions for FY20-21F from RM2,230/2,410/mt to RM2,450/2,540/mt. CTP is a pure-upstream planter and is expected to realise the full benefits of higher CPO prices, as it has a very high operating leverage being a pure upstream planter. Hence we believe that higher CPO prices would be able to drive its profits exponentially. CTP would not be affected by higher feedstock cost for refining, as it has negligible downstream exposure. Our target price (TP) rises to RM8.85, as we upgrade our earnings assumption by 17/16% for FY20-21F and maintain our DCF assumptions post FY21F.

Where we differ. We believe this stock is undervalued due to its net cash position and low book value. CTP’s net cash per share of RM3.20 is about 45% of its market cap and its book value of 1.0x is currently the lowest in our coverage.

Potential catalysts: Higher-than-expected CPO price and dividends. CTP is well positioned to pay more dividends given its sizeable cash pile. Our forecasts bake in a 50% payout; higher payouts would increase the attractiveness of the stock.

Valuation

Our discounted cash flow (DCF)-based (TP) stands at RM8.85, assuming a weighted average cost of capital (WACC) of 12.8%. CTP is currently trading at book value, which is the lowest in our coverage and our TP implies a price to book value of 1.2x

Source: Alliance Research - 8 Jan 2020