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IJM Plantations’ 2019 FFB production outlook sturdy

Maintain market perform with an unchanged target price of RM1.50:
We gather that an earlier shortage of barges in Indonesia has mostly eased since mid-December 2018, as the country’s production has tapered off on seasonality and fuel prices have declined.

As such, IJM Plantations Bhd’s (IJMP) management does not expect any supply disruptions in the fourth quarter of financial year 2019 (4QFY19), but has noted the risk of encountering the same problem again if production picks up in the second half of calendar year 2019 (2HCY19).

We understand that production in the Sugut region, which accounts for about two-thirds of Sabah’s output, still saw some lagged impact of El Nino in FY19.

Management expects production in the region to fully recover by the middle of FY20, and has conservatively guided for a fresh fruit bunch (FFB) yield of 20 tonnes/ha for Malaysia in FY20 (versus around 19 tonnes/ha in FY19).

For Indonesia, FFB yield is expected to improve from approximately 17 tonnes/ha in FY19 to 20 tonnes/ha in FY20. Overall, this translates into a 23% growth in FFB output to 1.22 million tonnes in FY20.

However, we are keeping our conservative forecast of 1.13 million tonnes (+13%) to account for the risk of further barge shortage in 2HCY19. In FY20, approximately 1,000ha of planted acreage is projected to come into maturity.

As Indonesia’s production yield improves, unit cost of production is expected to ease from RM2,100 to RM2,200 per tonne in FY19 to RM1,900 per tonne in FY20.

On the other hand, unit cost in Malaysia is likely to edge up from RM1,800 per tonne in FY19 to RM1,900 per tonne in FY20 due to higher fertiliser cost and full-year impact of a minimum wage increase — which raises labour cost by an estimated RM4 million in FY20.

Overall, the group’s blended cost of production is projected to drop by 5% from approximately RM2,000 per tonne in FY19 to RM1,900 per tonne in FY20.

Management believes RM2,400 per tonne is a realistic crude palm oil (CPO) price target for CY19.

This represents a 7% improvement from CY18, in line with our forecast. It is estimated that every RM100 per tonne change in CPO prices would translate into an earnings impact of RM20 million in FY20.

No changes in FY19 estimate (FY19E) and FY20E core net profit of RM13.6 million and RM73.7 million as production recovery and cost improvements have been factored into our earnings projections.

We maintain our “market perform” call as the company’s CY19E FFB production outlook is sturdy at +12% (versus peer average of 5%) and earnings are expected to improve in FY20 as cost of production declines.

We may relook our call if its outlook starts to improve post third quarter of FY19 results.

Risks to our call include sharp rises/falls in CPO prices and a precipitous rise/fall in labour/fertiliser/transportation costs. — Kenanga Research, Jan 16