IJM Plantation Bhd
(March 2, RM3.70)
Maintain hold with a lower target price of RM3.42 (previous target price: RM3.50). We tweaked down our earnings for forecast financial year ending March 31, 2015 (FY15F) and FY17F by 2% and 9% to factor in the higher-than-expected operating costs in the group’s Indonesian operations.

Following our earnings cut, peg FY16F earnings per share (EPS) at price-to-earnings ratio (PER) of 16 times, which is close to the mean PER of mid-cap planters.

While we like the group for its young tree age profile and growing earnings contribution from Indonesian operations, we think that its short-term earnings growth prospect has been priced in.

The group’s core net profit for its nine-month period in FY15 (9MFY15) advanced by 12.2% year-on-year (y-o-y), mainly due to the higher fresh fruit bunch (FFB) production that grew 29.6% y-o-y.  The robust growth of FFB production was buoyed by the group’s Indonesian operations where FFB production in Indonesian operations more than doubled y-o-y. 

Nevertheless, the earnings growth of the group missed our expectations which we believe was attributed to the higher-than-expected fixed plantation and maintenance and overhead costs incurred in its Indonesian operations following more palm oil planted area coming into maturity. 

The group’s Indonesian operations recorded a pre-tax profit of RM270,000 in 3QFY15 against a pre-tax loss of RM3.27 million in the previous quarter, buoyed by the robust FFB production as larger palm oil planted areas came into maturity. 

We continue to expect the group’s Indonesian operations to continue to register robust FFB production growth and support its earnings growth going forward. — JF Apex Securities Research, March 2

This article first appeared in The Edge Financial Daily, on March 3, 2015.