This article first appeared in The Edge Financial Daily on January 31, 2019

Chin Teck Plantations Bhd
(Jan 30, RM6.66)
Maintain buy with an unchanged target price (TP) of RM9.05: Chin Teck Plantations Bhd  posted a first quarter ended Nov 30, 2018 (1QFY19) net profit of RM9.6 million. Core earnings in the quarter stood at RM7.9 million, after stripping off gains on disposal and foreign exchange.

The fall in core earnings year-on-year (y-o-y) was mainly attributable to lower crude palm oil (CPO) prices and weaker overall demand in the Malaysian palm oil market. We deem 1QFY19 core profit to be within our expectations although it only constituted 21.5% of our FY19 net profit forecast as we expect higher CPO prices in subsequent months.

1QFY19 fresh fruit bunch (FFB) production came in at 52,200 tonnes. 1QFY19 FFB production was up y-o-y due to weaker overall yields from Malaysian plantations. However, FFB yields were 27% higher quarter-on-quarter, in line with the general production and mini resting period.

CPO production slid 13% to 10,100 tonnes in the quarter, consistent with the lower FFB production number. Extraction rate stood at 19.35% in 1QFY19, 0.93% lower versus 1QFY18, while the palm kernel extraction rate was 5.06%, 0.27% lower than the previous year’s corresponding quarter.

We believe Chin Teck is still undervalued with excess cash. The company’s war chest is still impressive despite its cash and bank balances sliding to RM301.2 million after spending RM21 million on investment securities. Chin Teck now has net cash per share of RM3.31, approximately 50% of the current share price of RM6.67. Chin Teck is also trading at an enterprise value  (EV)/planted hectare of about US$6,000 (RM24,660).

We remain positive on Chin Teck in view of its increasing and commendable FFB yields as more trees move towards peak production. We maintain our discounted cash flow-based TP of RM9.05 as the stock still offers very apparent upside potential with its high cash per share and low implied EV/hectare. We expect its FFB production to peak in FY21 and FY22, and we think that yields will get better progressively within the next few years. — AllianceDBS Research, Jan 30