Sustainable Turnaround Possible for IJM Plantations

PETALING JAYA: IJM PLANTATIONS BHD (IJMP) is on its way for a sustainable turnaround given the improving age profile of its oil palm trees, according to RHB Research.

In a report, the research unit said: “We continue to like IJMP for its prime age profile, which is on the verge of a turnaround in Indonesia, as yields improve and costs moderate.”

It is also maintaining a “buy” call on the planter with a slightly higher target price of RM2.05 from RM1.95 previously.

IJMP’s fourth quarter core earnings for the financial year ended March 31,2020 had beaten both RHB Research and the consensus expectations benefiting from higher palm oil prices and higher output.

The crude palm oil (CPO) prices rose 6.8% year-on-year (y-o-y) in Malaysia, while palm kernel oil prices fell 16% y-o-y in FY20 IJMP’s Indonesian output growth is also stronger than Malaysia.

The fresh fruit bunches (FFB) output was decent in FY20, rising 8.7% y-o-y, driven by a 5.2% rise in Malaysia’s output and an 11.6% rise in Indonesia’s output.

RHB Research noted that “the FFB output during the two months of FY21 is even stronger at 16.5% y-o-y, above the management’s guidance of a forecast 4%-5% growth for FY21 and our projected 4% growth.

“However, the management expects this growth to moderate in the second half of FY21 due to seasonality.”

IJMP’s FY20 unit cost is about RM1,800 per tonne for Malaysia and RM2,000 per tonne for Indonesia.

In addition, the impact of Malaysia’s CPO export tax exemption is positive for IJMP’s upstream division.

RHB Research noted that the waiver of export tax for palm oil until December this year bodes well for IJMP given its pure planter status.

“This is especially pertinent now that India has started buying again from Malaysia. We expect to see a shift of CPO exports from Indonesia to Malaysia.

“Local CPO will be more competitive versus Indonesia, which increased its export levy to US$55 per tonne last month from US$50 per tonne previously, ” added the research house.

MIDF Research is also maintaining a “neutral” call on IJMP with a lower revised target price of RM1.70 from RM1.86 previously.Moving forward, the research house expects the resilient FFB production could partially mitigate the persistent higher cost of production, which has capped the group’s earnings growth.

“In view of the expected resilient FFB production in FY21 and elevated CPO price on a year-over-year basis, we expect it would continue to support the group’s profitability in the coming financial years, ” added MIDF Research.

It pointed out that the anticipated higher FFB output is mainly predicated on the group’s increasingly matured planted area, of which 72% are in their mature-prime age as at March 31,2020.

However, the seemingly worsening Covid-19 outbreak and weakening economic conditions in major palm oil-consuming countries such as India, Indonesia, and the EU might dampen demand, thus putting pressure on the CPO prices.

RHB Research also remained wary of the group’s ability to effectively manage production costs, which could partially suppress the improvement in the group’s profit margin.