Potential surge in IJM Plantations’ FFB output

by **Cals** Mon 06 Jan 2014, 14:47

Business & Markets 2013

Written by Affin IB Research

Monday, 06 January 2014 10:41

IJM Plantations Bhd
(Jan 3, RM3.48)
Maintain reduce at RM3.44 with a target price of RM3.32: After the maiden planting of 308ha in financial year 2009 (FY09), a total of 27,491ha have been planted in Indonesia as at end-March 2013. New planting is expected to decline to about 2,000ha in FY14 ending March 31 due to land clearance and permits issues but is expected to rise to about 3,000 ha in FY15.

As the areas already planted in Indonesia progressively reach full maturity in FY16 and FY17, we expect IJM Plantations’Indonesian fresh fruit bunch (FFB) production to surge 83% in FY14, 94% in FY15 and 57% in FY16, implying blended FFB yield of 7.5 tonnes per ha, 11.6 tonnes per ha and 13.0 tonnes per ha respectively and pointing to its Indonesian operations breaking even from FY15.

Crude palm oil (CPO) prices, even though firmer in the last two months, have yet to exhibit a sustained bullish uptrend. We continue to cap our CPO average selling price forecast at RM2,700 per tonne, primarily due to the prospects of a higher South American soybean crop after a bumper US harvest, as well as the low soybean oil premium.

A weaker Indonesian rupiah and ringgit, which will raise fuel and fertiliser costs without a corresponding increase in rupiah- and ringgit-denominated CPO prices, is negative for planters like IJM Plantations.

Management expects cost of production (inclusive of sales tax) to increase. Furthermore, the US$185 million (RM609 million) borrowings used for its plantation development in Indonesia could result in more unrealised foreign exchange losses if the rupiah weakens further.

Based on the latest cost guidance and our latest estimates of FFB production, we raise our FY15 and FY16 earnings per share (EPS) forecasts by 0.5% and 12.8% respectively. Price target based on an unchanged target of 17 times calendar year 2014 (CY14) EPS is maintained at RM3.32.

We believe current stock price valuation will remain high unless a view is taken into CY15 and beyond. Maintain “reduce”.

Key risks to our forecasts and valuation include: (i) a stronger than expected recovery in the global economy; (ii) lower than expected soybean and palm oil production; (iii) unforeseen sharp spikes in fertiliser, fuel and labour costs; (iv) unfavourable exchange rate; (v) unfavourable policies (including changes in biofuel mandates); and (vi) changes in export tax rates and regulations. — Affin IB Research, Jan 3

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This article first appeared in The Edge Financial Daily, on January 06, 2014.