We believe the long-term growth prospect for IJM Plantation (IJMP) remains resilient and are positive on the group’s fundamentals. We see further potential for value enhancement for the group and investors should be able to seek refuge in its resilient earnings growth. We also continue to like the company for its experienced management team with transparent financial reporting. YTD, its share price has corrected by approximately 7%. The share has been brought down to attractive levels, which in our view, is a good entry point for investors. We reiterate our Buy recommendation on IJMP with an unchanged target price of RM3.88.

FFB Production on Recovery Path

Management guided that FFB production in FY17 is likely to be flattish compared to the previous year. For the first 11 months of FY17, the FFB production decreased by merely 0.7% YoY to 792.7k tonnes. However, FFB production has been growing on YoY basis since Oct 2016 from 0.4% to 42.3% in Feb 2017. We expect FFB production to increase further in March and the total FFB production growth to come in the range between 1.5% and 2.0% for FY17. We expect FY17 earnings to reach RM120.5mn (>100%), mainly driven by higher CPO price and OER. For FY18, management expects FFB production or growth to be in the range of 920k-950k or 8%-12%, underpinned by more planted areas in Indonesia reaching maturity (another 2k ha to come into maturity in FY18). We expect FY18 contribution from Indonesia to account for 41% from estimated 38% in FY17 (34% in FY16).

OER has Been on an Upward Trend Since FY12

IJMP has a proven track record in managing its estates efficiently, as reflected in the high oil yield of its Malaysian estates. We expect the group to emulate similar best estate practices in Indonesia, which will boost ROE in the long run. The Oil Extraction Rates (OER) in Malaysia has stayed above Malaysia’s average benchmark in the last 5 years. Meanwhile, the OER in Indonesia also showed promising trend from 22.5% in FY13 to 24% in FY16 (see Figure 3). We expect Indonesia operation to perform better for the next 2 years as the mature acreage reaches the economies of scale and higher FFB yield from existing matured area. Management expects FY17 FFB yield for Malaysia and Indonesia to be 20 tonnes/ha and 14 tonnes/ha, respectively. While for FY18, the FFB yield is expected to improve to 22 tonnes/ha and 17 tonnes/ha for Malaysia and Indonesia, respectively.

Improving Balance Sheet with Healthy Cash Flow

We expect IJMP’s balance sheet to remain healthy going forward with comfortable net gearing of 0.3x. Capex is expected to be lower after FY18 due to limited planting land bank left in Indonesia. Note that the group has a total land bank 50,443 ha in Indonesia of which 34,544 ha or 68% had already been planted with palm oil. Management guided that the capex requirement for FY17 and FY18 would be approximately RM150-160mn (cater mainly for Indonesia’s operation). We expect IJMP’s negative free cash flow to turn positive in FY19 with cash of RM49mn and this could potentially mean higher dividend after FY19.

Attractive Valuation

IJMP share has been brought down to an attractive level, which in our view is a good entry point for investors. Maintain BUY on IJMP with an unchanged target price of RM3.88, based on PER of 23x. We like IJMP premised on its higher FFB production growth towards FY18 and reduction in operating costs. Key risk factors to our call are, 1) a downcycle in CPO price, 2) weakening of USD, 3) global economic slowdown, 4) a prolonged drought resulting in lower FFB production, 5) large supply of soybean oil in the market.

Source: TA Research - 28 Mar 2017