IJM Plantations Bhd
(Nov 4, RM3.60)
Maintain “add” with a lower target price (TP) of RM3.63: From the year’s low of RM1,929 per tonne, crude palm oil (CPO) three-month futures have rebounded by 20% to RM2,306 per tonne.

Even though export growth remains lacklustre, fresh fruit bunch (FFB) yields may have peaked early in August and have been trending lower.

The government’s decision to extend CPO export duties until December and implement (in stages) the B7 biodiesel mandate to cut inventory levels as well as the more upbeat price expectations of key planters and forecasters have further boosted sentiment. IJMP’s share price has also rebounded by an impressive 12% from the low of RM3.22 two weeks ago.

A key attraction of IJMP is its superior FFB-production growth in the next few years.

Estimated average palm ages of 13.4 years and 3.5 years for its Sabah and Indonesian plantations give a young blended average of eight years. With the large immature areas in Indonesia, we expect the total mature area for the group to almost double to approximately 53,000ha in three years from 27,802ha currently.

Coupled with the relatively high yields in Indonesia, we now expect group FFB production to grow by 17% in financial year 2015 (FY15), 20% in FY16 and 12% in FY17 (up from around 730,000 tonnes in FY14).

We trim our FFB-production forecasts for FY15 and FY17 by 2.2% and 1.1% respectively, and raise our FY16 by 1.7% .

By FY18, we expect FFB production from the Indonesian plantations to exceed that from the Sabah estates.

The group has another 4,000ha awaiting permit and certification in Indonesia. The management has no plans for significant new land acquisitions. Instead, the focus will be on extracting maximum yields from new areas planted in Indonesia. Replanting of old areas in Sabah should continue.

We trim our 12-month TP for IJMP to RM3.63 (from RM3.71), pegged to our revised calendar year 2015 earnings per share forecast of 21.3 sen (21.8 sen previously) and an unchanged 17 times target price-to-earnings ratio (PER).

With an upside potential of 2.7% (inclusive of FY15 dividend yield of 1.9%) we maintain our “add” rating.

We expect IJMP’s strong FFB-production growth prospects to lend support to its share price.

Based on our CPO average selling prices forecast of RM2,600/tonne in 2015 and RM2,700/tonne in 2016 to 2017 and our new FFB-production growth estimates, we expect the FY16 and FY17 PERs to trend lower to 15.4 times and 13.5 times respectively.

Key downside risks include: (i) renewed weakness in the global economy and higher-than-expected soybean and palm oil production dampening vegetable and crude oil prices; (ii) an unforeseen spike in the cost of production; (iii) unfavourable/unfair policies (including changes in biofuel mandates) curtailing palm oil usage; and (iv) changes in export tax rates and regulations (including land ownership and foreign shareholdings in Indonesia). — Affin Hwang Capital, Nov 4

This article first appeared in The Edge Financial Daily, on November 5, 2014.