FFB growth expected to continue for IJM Plantations

IJM Plantations Bhd

(July 3, RM2.25)

Maintain hold with an unchanged target price (TP) of RM2.05: IJM Plantations Bhd’s Indonesian fresh fruit bunch (FFB) yield in financial year 2018 (FY18) amounted to 15 tonnes per hectare, lower than its Malaysian FFB yield of 20.8 tonnes/ha, partly attributable to the younger palm trees in the Indonesian estates.

We believe FFB production will continue to grow in FY19 to FY21 as the lag effect of 2015/2016 El Nino is eliminated, an improvement in yield as well as an increase in matured acreage, but we have cut our FFB growth production assumption to 3%-9% from 2%-15% previously, due to lower production of its Indonesian estates.

Prices of most vegetable oils have been under pressure with an improvement in global production, including palm oil. Our crude palm oil average selling price forecast for IJM Plantations is at RM2,450 per tonne to RM2,500 per tonne over FY19 to FY21, from RM2,532 per tonne in FY18. Although FFB production has improved, IJM Plantations continues to be affected by the low start-up yields while incurring full plantation maintenance costs and overheads.

We expect the group’s production costs to decline from around RM1,700 per tonne in FY18 to RM1,650 per tonne by FY21. This is provided that there is no minimum wage hike. For every RM100 increase in minimum wage, costs would rise by about RM4.5 million per year, equivalent to a cut in our FY19 earnings per share forecast by 6%.

IJM Plantations has guided for a higher effective tax rate due to derecognition of certain deferred tax assets, the tax treatment of foreign exchange movements and non-deductibility of certain expenses for tax purposes at overseas subsidiaries.

We raise our tax rate assumption for FY19 to FY21 to 30% from 24%. We cut our FY19 to FY21 earnings forecasts by 25% to 27% in our recent report, mainly to factor in lower production growth, a slower decline in production costs as well as a higher effective tax rate assumption.

Following the cut in our earnings forecasts, our TP for IJM Plantations is lowered to RM2.05, based on an unchanged 22 times price-earnings ratio applied to our core earnings per share forecast for calendar year 2019. — Affin Hwang Capital, July 3