KEY INVESTMENT HIGHLIGHTS

• 2QFY20 normalised losses narrowed to -RM0.4m, supported by the Indonesian operation

• 1HFY20 FFB production growth of +10.6%yoy helps to narrow 1HFY20 normalised losses to –RM9.1m

• Recovery of CPO price to above RM2,500/mt to partially add momentum to earnings growth

• Change in valuation methodology to price-to-book ratio in view of earnings volatility

• Upgrade to NEUTRAL with an adjusted TP RM1.73

Lower losses. IJM Plantation Bhd’s (IJMPLNT) 2QFY20 normalised losses narrowed to -RM0.4m as compared to –RM7.0m in 2QFY19 due to improved sales volume. However, the group’s 1HFY20 normalised losses came in at –RM9.1m against a normalised profit of RM3.8m in 1HFY19 which was mainly attributable to the low ASP of CPO. This came in below both our and consensus expectations of the FY20 earnings forecast.

Decline in CPO price. IJMPLNT’s 1HFY20 normalised loss position was a result of the decline in CPO prices in both Malaysia and Indonesia to RM1,953/mt (-16.0%yoy) and RM1,821/mt (-8.9%yoy) respectively. Meanwhile, the ASP of blended palm kernel oil (PKO) plunged by - 32.6%yoy to RM2,287/mt. On the contrary, 1HFY20 FFB production came in higher at 497,069mt (+10.6%yoy). This, however, was insufficient to mitigate the declining ASP of CPO.

EBIT margin improving. On a quarterly basis, the EBIT margin of the group jumped by +19.1ppts yoy to +0.3% as revenue jumped by +23.4%yoy premised on higher sales volume. Consequently, this led to an improving normalised PATAMI margin to -0.2%, representing an increase of +4.5ppts yoy.

Earnings estimates. We are maintaining our earnings estimates as we expect the recovery of CPO price to above RM2,500/mt in 4QCY19. Moreover, healthy FFB production would further add to the earnings growth momentum in the coming quarters.

Target price. We are changing our valuation methodology to price-tobook value from price-earnings ratio in view of the group’s earnings volatility. This led to revision in our TP to RM1.73 (previously RM1.16) which is achieved by pegging the group’s FY21 book value per share of RM1.57 to a price-book ratio (PBR) of 1.1x. Note that this is one standard deviation below its two-year historical average of PBR.

Source: MIDF Research - 27 Nov 2019