IJM Plantations - Earnings recovery in FY14F BUY

- Maintain BUY on IJM Plantations (IJMP), with an unchanged fair value of RM3.65/share based on a PE of 16x on FY14F basic EPS. IJMP’s PE band ranged from a low of 6x to a high of 28x in the past seven years. Mean PE was 18x.

- Although IJMP’s PE valuations are almost similar to Genting Plantations’, IJMP offers higher dividend yields of 3.2% to 3.3%, according to  Bloomberg consensus estimates. In contrast, GenP’s FY13F-FY14F dividend yields are 1.6% to 1.7%. 

- We believe that IJMP’s net profit would rebound by more than 10% in FY14F from a relatively flat FY13F. Profit growth in FY14F is envisaged to be driven by a recovery in FFB production in Sabah and a two-fold surge in FFB output in Indonesia.  

- Production costs in Malaysia are forecast to remain stable, below RM1,400/tonne in FY14F. The recent fall in crude oil prices should soften fertiliser costs, while labour costs are expected to stabilise after the implementation of the pay increment/minimum wage in late-2011.

- We reckon that IJMP’s new palm oil mill in Kalimantan would also be relying less on external FFB for its requirements in FY14F. As such, operating margin of the mill should improve in FY14F, aided by a lower cost of FFB purchases. 

- We believe that the new mill would enjoy a greater volume of internal FFB in FY14F. IJMP’s FFB production in Indonesia is expected to surge 122% to more than 100,000 tonnes in FY14F underpinned by an expansion in mature areas. 

- IJMP’s FY13F pre-tax profit is anticipated to be flat, due to a fall in palm oil production in Sabah and higher production costs.  

- Overall, we estimate that IJMP’s FFB production would shrink 1.6% in FY13F. Although the group’s FFB output in Sabah is forecast to ease 5%, this would be partly compensated by a 105% increase in FFB production in Indonesia. IJMP’s FFB output in Indonesia is estimated at 45,000 tonnes in FY13F compared to 22,000 tonnes in FY12. 

- IJMP’s new palm oil mill in Kalimantan is envisaged to be completed in 3Q2012, coinciding with the peak palm oil output season in Indonesia and Malaysia. The mill would be sourcing FFB mainly from third parties in FY13F, as IJMP’s FFB output is not large enough yet. IJMP’s new palm oil mill is expected to command a capacity of 70 tonnes/hour. The cost of the palm oil mill is about RM70mil.

Source: AmeSecurities