United Malacca Bhd
(Sept 23, RM5.70)
Maintain outperform with a lower target price (TP) of RM6.50: United Malacca Bhd’s first quarter ended July 31, 2016 (1QFY17) core net profit (CNP) came in at RM8.2 million, making up 12% of consensus forecast of RM65.6 million and 11% of our RM71.9 million forecast. This was mainly due to weaker-than-expected fresh fruit bunch (FFB) production recovery, which made up only 20% of our full-year expectations due to the droughts in 2015 as well as higher-than-expected cost from newly matured area. No dividend was announced, as expected.

Year-on-year (y-o-y) CNP declined 40% despite crude palm oil (CPO) prices improving 13% and palm kernel (PK) prices jumping 61%. This was mainly due to weaker FFB volume that declined by 15%, which led to higher production cost per tonne and thus weaker margins. Quarter-on-quarter, CNP weakened 39% as CPO prices were flat with  a 2% increase while PK prices increased 11%. We believe this was because FFB volume recovery of 42% was led by production from 1.7k ha of newly matured area in Indonesia, which saw higher fixed cost and thus weaker margins.

With stable weather and supportive CPO prices, we expect production and earnings recovery to continue in the coming quarters. Over the long term, production costs should normalise as the new Indonesian area continues to mature. Management noted that 833ha of new area is expected to mature in FY17, which should contribute to above-average FY17 to FY18 growth of 10% to 14%, compared with the sector calendar year 2016 (CY16) to CY17 average of 2% to 10%. We cut our FY17 to FY18 earnings by 33% to 21% as we adjust our FFB growth forecast from 14% to 9% to 10% to 14% as we move forward FY17 production to FY18 to account for slower production recovery. We also revise up our cost assumptions to reflect higher fixed expenses resulting in higher cost per tonne in Indonesian operations.

We maintain “outperform” with a lower TP of RM6.50 from RM7.42 as we account for lower FY17 to FY18 earnings and roll forward our valuation base year to CY17 from FY17 for CY17 earnings per share of 31 sen from 35.4 sen. We maintain our forward price-earnings ratio of 21 times, which is based on +0.5 standard deviation valuation in line with other planters with above-average growth prospects. We also like United Malacca for its long-term growth potential, given its young average tree age and possibility of further upstream or midstream expansion in Indonesia. We also note the potential crop diversification beyond palm oil, which should reduce price risk from fluctuations in CPO prices in the long run. — Kenanga Research, Sept 23