KUALA LUMPUR (Feb 15): CGS-CIMB Research has initiated coverage on pure upstream oil palm player United Malacca Bhd (UMB) at RM5.09 with a "hold" rating and a target price of RM5.23.

In a note Feb 11, CGS-CIMB analysts Nagulan Ravi and Ivy Ng Lee Fang said the group appears fairly valued at current levels given its weak profitability but could rerate should the group unlock the value of its undervalued estates.

“UMB’s share price appears supported by a low EV/ha [enterprise value per hectare] of circa RM38,000 (based on its respective stakes in its planted estates ex-plasma), which could serve as a rerating catalyst should the group choose to unlock value through sale of its estates.

“Excluding this prospect, the stock appears fairly valued as it is trading in line with our target price. Upside/downside risks to our estimates and target price are higher/lower CPO [crude palm oil] prices and production,” said the analysts.

They gather that the group is currently in the process of improving its practices to enhance yields at its estates, which should allow the group to turn profitable in FY21 ending April 30, 2021.

This was backed by higher CPO prices and improving fresh fruit bunch (FFB) yields from its Indonesian estates, noted the analysts.

“We are forecasting FY21-23F y-o-y FFB growth of 9-11%, driven by new mature areas from its Kalimantan estates and improving yields from its Malaysian estates. This as well as higher CPO prices relative to FY20 and the commissioning of their new Kalimantan mill are the key drivers to our forecast of a turnaround in net profit in FY21F,” they added.

At the time of writing today, shares of UMB had fallen nine sen or 1.77% to RM5, valuing the group at RM1.05 billion.