Review

• IJMP showed an improvement in 2QFY20 results. However, the improvement is still below expectations. Stripping out exceptional items, IJMP’s reported a core net loss of RM9.1mn in 1HFY20 compared to a profit of RM3.8mn recorded a year ago. The net loss was attributed mainly to lower palm oil prices.

• Despite lower revenue, Malaysia’s PBT doubled to RM8.6mn in 1HFY20 as a result of strong FFB production. FFB production increased by 31.0% to 221.4k tonnes. The average CPO price was lower at RM1,953/tonne in 1HFY20 (-16.0% YoY). Meanwhile, the palm kernel oil price also dropped by 36.7% to RM2,231/tonne.

• For Indonesia, 1HFY20 revenue increased by 9.5% YoY to RM168.0mn as a result of higher sales volume. A lower LBT of RM18.9mn was recorded compared to a LBT of RM62.1mn in the previous year. Indonesia recorded FFB production drop of 1.7% YoY to 275.6k tonnes in 1HFY20. The average CPO price declined by 8.9% YoY to RM1,821/tonne while the palm kernel oil price also plunged by 28.2% to RM2,343/tonne.

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

Impact

• We have factored in higher CPO price assumptions of RM2400/tonne and RM2,500/tonne for CY20 and CY21, respectively. However, earnings forecasts for FY20 has cut by 61.2% after imputing weak 1HFY20 results and higher depreciation charges. Meanwhile, earnings for FY21 and FY22 are revised upward by 24.4% - 39.1%, respectively.

Outlook

• We expect higher CPO prices for CY20 and CY21, underpinned by lower palm oil supply, firmer soybean oil prices and higher biodiesel mandates, which are expected to reduce palm oil stockpiles.

• Management expects FFB production to exceed 1mn tonnes in FY20, underpinned by an increase in planted areas in Indonesia reaching maturity and yield recovery in both Malaysia and Indonesia’s estates from the effects of El-Nino.

• Despite higher FFB production and palm oil prices, management remains cautious on the outlook due to cost pressures arising mainly from wage increases and the volatility of the foreign exchange rates, particularly the weak Rupiah against the USD and Japanese Yen.

Valuation

• Maintain SELL on IJMP with a higher target price of RM1.41/share (from RM1.27/share previously), based on CY20 PER of 25x.

• While we believe that IJMP would benefit from the high CPO prices, the share price has run well ahead of fundamentals, in our view. The stock appears pricey after its big run-up in recent months.

Source: TA Research - 27 Nov 2019