Following a sector-wide CPO price downgrade, we lower our earnings projections  for  IJM  Plantations  by  21.4%  for  FY15  (FYE  March)  and 23.5%  for  FY16.  We  also  cut  our  FV  to  MYR3.30  (from  MYR4.29)  and downgrade our recommendation to NEUTRAL. Although we continue to like its FFB growth prospects, this is offset by its significant leverage to CPO prices – which has negatively impacted valuations. 

Downgrading  sector-wide  CPO  prices.  We  are  downgrading  the Malaysian  plantation  sector  to  NEUTRAL  (from  Overweight).  Our  CPO price assumptions  are  lowered  to MYR2,400/tonne  (from MYR2,700) for CY14 and MYR2,500/tonne (from MYR2,900) for CY15.  

Palm oil prices close to bottom. We believe palm oil prices are weeks away from a bottom and should strengthen in the 4Q as well as in CY15. That said, the current low levels would drag down the full-year average -which justifies the cut in our assumptions. 

We  expect  prices  to  strengthen  in  4Q14  and  2015,  due  to:  i)  the seasonal slowdown in production in 4Q14, which has accompanied  CPO prices rising by 11% from end-Sept to end-Dec every year since 2000, ii) the  slower-than-expected  off-take  for  biodiesel  in  Indonesia  in  2014caused  by  pricing  issues  no  longer  applies  while  distribution infrastructure  is  being  developed  –  which  should  see  Indonesia‟s  B10 programme  moving  into  full  swing  in  2015,  and  iii)  the  downside  for soybean  prices  is  limited  as  it  is  already  trading  at  or  near  production cost. While the soybean  stock/usage ratio will be high  this year (>30%) due to  the  bumper crop in the US, such elevated levels usually do notpersist. 

Reducing forecasts. We trim our forecasts for IJM Plantations following the sector-wide price  cut  by  21.4% for FY15  and  23.5% for FY16. Our CPO price assumptions are MYR2,425/tonne for FY15 (from MYR2,750) and MYR2,500/tonne for FY16 (from MYR2,850). 

Now NEUTRAL.  Post earnings revision, our FV dips to  MYR3.30  (from MYR4.29), based on  an unchanged 16x CY15  target P/E.  Although we continue to like the growth prospects of its Indonesian FFB, this is offset by  its  significant  leverage  to  CPO  price  movements,  which  has negatively  affected  valuations.  Every  MYR100/tonne  change  in  CPO price would affect its earnings by 5-7% per annum. 

Source: RHB