RHB says IJM Plantations ready for cyclical rotation, keeps ‘buy’ on valuation

RHB says IJM Plantations ready for cyclical rotation, keeps ‘buy’ on valuation
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KUALA LUMPUR (July 27): RHB Investment Bank Research has maintained its “buy” rating on IJM Plantations Bhd with a higher target price of RM2.45 from RM2.05 based on a 25 times to FY21F (March) price-earnings ratio, in line with its mid-cap peers, and an upside with around 2% yield.

In a note today, RHB analyst Hoe Lee Leng said with markets in a liquidity-driven rally, they believe cyclical sectors like plantations could be the next play, providing investors with a relatively safe haven, in terms of earnings.

“We expect demand to continue to pick up as the development of vaccines will instill confidence in businesses. Smaller cap pure-planters like IJM Plantations will benefit from the recent crude palm oil (CPO) price rise, while valuation is still decent.”

Hoe noted CPO prices have rallied of late to the current levels of RM2,739/tonne.

“While we do not see any significant catalyst for this, other than the recently-realised Malaysian plantation statistics — which were a positive surprise — we believe a large part of this 'rally' could have been caused by the current market liquidity.”

The market liquidity has permeated equities, fixed income and commodities, she noted

“That being said, we believe CPO prices are likely to hold relatively steady in 3Q20, given that CPO production only started ramping up in June.”

Pent-up demand is likely to continue at least until August or September, in light of the Deepavali festival in November.

“Post-3Q20, we continue to hold on to our view that 4Q20F should see a pullback in prices, on the back of the seasonal peak production period which will end in 4Q20F, and lower post-festive demand.”

Hoe said on the whole however, CPO prices in 2020F are expected to be 13% higher than that of 2019. Production for most planters, particularly those in Indonesia, will also be higher.

This means earnings will be stronger year-on-year (y-o-y) in 2020 and 2021, given their expectations of a higher RM2,500/tonne CPO price.

“This earnings security, we believe, will give investors a reason to invest in the sector, provided that valuations make sense, of course.

“Extending our investment horizon in line with market expectations, we roll forward our valuation period to December 2021, from June 2021F, for all the stocks under our coverage, while mostly keeping our valuation targets intact," she said.

The RHB analyst said IJM Plantations is currently trading at its price-to-book ratio (P/BV) global financial crisis trough of 1.1 times.

“Our TP implies an enterprise value per hectare (EV/ha) of US$9,000/ha, which is at the lower end of its peer range, which trades at an EV/ha of US$8,000 to US$15,000/ha," she said.

At 10.22am, IJM Plantations gained 2 sen or 1.03% to RM1.97, with a market capitalisation of RM1.72 billion. The stock saw some 21,900 shares traded.