IJM Plantations’ Indonesia venture to fuel growth

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IJM Plantations Bhd’s venture into Indonesia as part of its plans to increase landbank would be positive to the firm’s long-term growth, HLG Research said.

The research firm initiated coverage on the planter with a buy recommendation, pegging a price target of RM2.50 based on implied crude palm oil (CPO) price of RM2,200 a tonne derived from zero-growth discounted cash flow (DCF), 14% weighted average cost of capital (WACC).

At the current level, IJM Plantations was trading at an implied CPO price of RM1,960 a tonne and RM55,000 enterprise  value (EV) per hectare, which was between 20% and 50% discount to its large-cap peers.

The research firm favoured IJM Plantations as its share price had underperformed the Kuala Lumpur Composite Index (KLCI) over the past 12 months.

“IJM Plantations’ young tree profiles of around nine years old will see yields improve over the next two to three years. It also has higher dividend payout ratio of about 40% compared to its peers,” it said.

IJM Plantations’ recent acquisition of a 32,000ha plantation land in East Kalimantan, Indonesia, increased its landbank to 62,000ha.

“IJM Plantations had budgeted RM600 million to develop new oil palm estates in Indonesia over the next five years but we may see this being reduced due to lower CPO prices and lower cost of acquisition. We expect trees to bear fruit within the next three to five years with 2,000ha of new plantings annually,” it said.

HLG Research also said the close proximity and fertile land on Borneo island would be positive to future growth of the plantation player.

It noted that IJM Plantations’ Sabah oil palm estates are efficiently run, with fresh fruit bunches (FFB) yield and an oil extraction rate (OER) of 25.1 tonnes per ha and 21.3%, respectively, which compared favorably against Malaysian average FFB yield of 20 tonnes per ha and an OER of 20.2%.

Meanwhile, IJM Plantations had deferred its biodiesel venture with CTI Biofuels Malaysia as a result of falling crude oil prices and expensive palm feedstock. “The project had been further delayed as the current biodiesel pricing is not viable for commercialisation. We view this as positive,” it said.

IJM Plantations put on four sen to RM3.62 yesterday.  This article appeared in The Edge Financial Daily, March 11, 2009.