Review

• IJMP’s 3QFY17 reported net profit declined by 46.6% QoQ to RM23.6mn, mainly due to the unrealised forex losses amounted to RM16.9mn. However, stripping out the forex and fair value losses on CPO derivatives, 3QFY17 core net profit actually increased by 11.7% to RM42.3mn.

• Cumulatively, 9MFY17 core net profit increased by 41.6% YoY to RM93.6mn, which came in within expectations. The core net profit of RM93.6mn accounting for 78% and 77% of ours and consensus’ full year estimates. This commendable result was mainly due to higher commodity prices, which offset the decline in FFB production (-4.6% YoY).

• Malaysia operations recorded PBT of RM108.6mn as compared to RM63.0mn in 9MFY16. The better performance was mainly driven by higher commodity prices (CPO: +26.4% to RM2,674/tonne), palm kernel oil (+75.6% YoY to RM5,631/tonne) despite lower FFB production (-9.2% to 379.5k tonnes). Management guided that the low FFB production was mainly due to the change in cropping pattern and the impact of the prolonged dry weather since 2015.

• Meanwhile, Indonesia operations recorded a better PBT of RM23mn as compared to LBT of RM15.9mn in the previous year. The increase was mainly due to higher commodity prices (CPO: +34.6% YoY to RM2,504/tonne) and palm kernel oil (>100% to RM5,132/tonne), coupled with better FFB production (+2.3% YoY to 285.4k tonnes).

• No dividend has been declared for the quarter under review.

Impact

• No change to our earnings forecast.

Outlook

• Management expects FY17 to perform better given the prevailing high commodity prices despite flattish FFB production ~850k tonnes.

• Meanwhile, the FFB production growth in FY18 is expected to be in the range of 8% - 12%. However, management does not rule out the possibility of another dry lag effect to happen in 2017.

Valuation

• We roll forward our valuation to CY18. Target price for IJMP is adjusted higher to RM3.88 (previously RM3.50), based on unchanged PER of 23x.

• We upgrade the stock from Sell to BUY, premised on higher FFB production growth towards FY18 and improve in operating costs. Key risk factors to our call are, 1) a downcycle in CPO price, 2) further strengthening of USD, 3) global economic slowdown, 4) a prolonged drought resulting in lower FFB production.

Source: TA Research - 24 Feb 2017