This article first appeared in The Edge Financial Daily on September 21, 2018
IJM Plantations Bhd
(Sept 20, RM2.50)
Maintain buy with an unchanged fair value (FV) of RM3: Our FV is based on a 15% discount to IJM Plantations Bhd’s revalued net asset valuation (RNAV) of RM3.53/share. Our FV of RM3/share implies a financial year 2020 forward (FY20F) price-earnings ratio (PER) of 25.2 times. We have used RNAV instead of PER to value IJM Plantations as we believe that IJM Plantations is a takeover target.
Due to the depreciation of the Indonesian rupiah against the US dollar, we believe that IJM Plantations would be recording more unrealised foreign exchange (forex) losses in respect of its US dollar borrowings and interest expense.
We have not factored this into IJM Plantations’ FY19F net profit as unrealised forex loss is a non-cash item. There is a possibility that IJM Plantations’ unrealised net forex loss may increase by more than 20% in FY19F from FY18’s RM25.9 million. IJM Plantations’ unrealised forex loss was RM30.9 million in the first quarter (1Q) of FY19 versus RM800,000 in 1QFY18.
Since the beginning of April, which is the start of IJM Plantations’ financial year, the rupiah has declined by 6.6% year-on-year (y-o-y) against the US dollar and 12.8% y-o-y against the ringgit. IJM Plantations’ operations in Indonesia are reported in rupiah. The US dollar loans are translated into rupiah in Indonesia and then converted from rupiah to ringgit when the books are consolidated in Malaysia. All of IJM Plantations’ RM751.4 million gross borrowings are denominated in US dollars.
Operationally, we are sticking to our assumption of a 10% growth in IJM Plantations’ FY19F fresh fruit bunch (FFB) production for now (FY18: 8.2%). IJM Plantations’ FFB output in Malaysia is expected to pick up from October or November 2018 onwards on the back of a recovery in yields. IJM Plantations’ FFB production shrank by 6.5% y-o-y in the cumulative five months of FY19.
We gather that IJM Plantations’ FFB production in Sabah had been poor in the past few months due to the lagged impact of the El Nino. In Indonesia, although FFB and crude palm oil (CPO) production was robust, the refiners in East Kalimantan were not buying CPO due to insufficient storage capacity and a bottleneck at the barges. We understand that this issue would be resolved in a month’s time as industry FFB production in East Kalimantan ease in September or October.
We believe that IJM Plantations’ production cost per tonne would increase in FY19F due to higher costs of fertilisers and wages. We think that IJM Plantations’ production cost (all-in) in Malaysia would inch up from RM1,600/tonne in FY18 to RM1,700/tonne in FY19F. In Indonesia, IJM Plantations’ production cost may rise from RM2,000/tonne in FY18 to RM2,050/tonne in FY19F. — AmInvestment Bank, Sept 20