We recently met up with Mr. Peter Benjamin, CEO of United Malacca and Ms. Susan Lai, CFO of United Malacca. We remain optimistic about the growth prospects for the group especially in Indonesia. We expect the net profit to grow at a CAGR of 14% over the next three years, propelled by new mature land in Indonesia and the recovery in FFB production as ElNino effects fade. On valuation, we revise United Malacca’s fair value to RM6.53/share based on 22x CY17 EPS. Maintain Buy Here are some key highlights from the meeting:

High Growth Profile from Indonesian plantation

According to management, the growth in FFB production is expected to be higher in FY17 and FY18 due to more new mature areas, especially from Indonesia. Besides, the recovery from the impact of El Nino and favourable plantations age profile (Malaysia: 9.8 years, Indonesia: 2.3 years) would help to boost its production going forward, in our opinion.

In FY16, the group has a total planted land bank of 32,681 ha. Of this, approximately 10,503 ha or 43% of its 24,585 ha land bank in Indonesia already planted with palm oil. Looking at the existing plantation profile, management guided that the total mature hectarage will increase by 4,000 ha to 4,250 ha in FY17. For FY18, another 3,000 - 4,000 ha will come to maturity. With that, management expects FFB production to increase by 6%-7% in FY17 and 10% in FY18.

Escalating Capex

Management plans to complete the remaining planting of 6,000 ha (or 2,000 ha per annum) over the next three years. Furthermore, management expects the new mill in Kalimantan with a total production capacity of 45/90 tonnes per hour (tph) to be ready by CY18/CY19. All these would require the company to allocate capex of approximately RM100mn for FY18, assuming a replanting cost of RM18k – RM19k /ha and the construction cost of RM67mn for the new mill. This is within management previous guidance that the group will allocate USD50mn capex over the next 4 years. The capex will be funded through internal fund or external borrowing. The group has a cash pile of approximately RM34.3mn with limited net gearing of 0.06x as at 31 Oct 2016. Thus, external funding will not add any stress to its balance sheet, in our view.

Diversify into Other Crop

Meanwhile, management guided that the JV with Pt Bintang Gemilang Permai (BGP) to develop 59,920 ha land in Central Sulawesi will take off and the group intends to hold 60% stake in the JV. The land is still undergoing topography studies and the possible crops that can be planted range from stevia, cocoa, coffee or coconut. According to management, these crops have very good profit potential and high in demand. More importantly, these crops have very short interval harvest months. For example, coconut trees can be harvested every 2-3 months.

Earnings Forecasts Revised higher

We adjust our mature acreage higher, thus increasing our FFB production assumptions to be in line with the management’s guidance. Accordingly, we upgrade FY17/18/19 earnings forecasts by 1.9%/2.9%/8.2%, respectively.

Valuation

We derive a new target price of RM6.53 per share for United Malacca, based on 22x CY17 EPS. The target PER of 22x, is at 1 PE multiple lower than our target PE of 23x for the sector to reflect its poor trading liquidity. We like United Malacca due to its young tree profile, a strong growth profile and attractive valuations. Maintain BUY on United Malacca. 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, 5) longer than expected turnaround for its Indonesia’s operation.

Source: TA Research - 7 Mar 2017