Chin Teck Plantations Bhd
(June 19, RM6.95)
Initiate coverage with buy with a target price (TP) of RM9.15: Chin Teck Plantations Bhd is a Peninsular Malaysia-based oil palm plantation player with around 10,900ha of planted area across estates in the states of Pahang, Kelantan, and Negeri Sembilan. Thanks to its disciplined replanting over the previous decade, its fresh fruit bunch (FFB) yields are set to rise for two years in a row to exceed 24 tonnes/ha in financial year 2018 forecast (FY18F). Further, these levels are sustainable given its rebalanced tree age profile with an easing average age.
With heightened yields, Chin Teck’s FFB production levels are expected to rise 23% in FY18F to above 210,000 tonnes. This will be sufficient to improve gross margins and maintain its core earnings base despite an expected decline in crude palm oil (CPO) average selling price. FY18F will additionally see a profit boost of around RM30 million from its disposal of investment securities.
We think Chin Teck can produce a bumper dividend in FY18F given its hike in net profit, even if we assume the lower end of its dividend payout ratio range in recent years. This is further supported by its high levels of net cash (RM2.80 per share at end FY17), which makes up 40% of market capitalisation.
At around 15 times core price-earnings (around seven times ex-cash) and 0.9 times price-to-book value, Chin Teck is trading at valuations that are below both its historic mean and those of other plantation players under our coverage. Current valuation also implies an enterprise value per planted hectare of less than RM28,000, which we deem low for its Peninsular Malaysia-based land bank
We derive a TP of RM9.15 for Chin Teck using discounted cash flow (11% weighted average cost of capital; 0.5% TG). Our forecasts incorporate spot CPO price forecasts of RM2,620, RM2,600 and RM2,630 per tonne for calendar year 2018 forecast (CY18F), CY19F and CY20F.
As Chin Teck’s earnings are subject to the selling prices of CPO and palm kernel, any sustained price decrease will reduce forward earnings prospects and thus firm value. — AllianceDBS Research, June 25