United Malacca Bhd
(June 23, RM6.11)
Maintain buy with a higher target price of RM7.47: United Malacca has released its fresh fruit bunch (FFB) and crude palm oil (CPO) production data for financial year 2015 (FY15) on the Bursa Malaysia website. Based on the data, FFB production increased 2.2% year-on-year (y-o-y) to 341,200 tonnes. Note that palm oil production recovered sharply in March (+30.1%) from the flood damage in Sabah to 24,400 tonnes (+30.1% month-on-month [m-o-m], -0.5% y-o-y), while for April, it climbed to 26,500 tonnes (+8.4% m-o-m, +8.7% y-o-y). We believe growth was mainly driven by the Millian-Labau estates in Sabah, which still have a very young tree age profile. To recap, the Malaysian Palm Oil Board data in May indicated that FFB yield had improved in Sabah. The upward momentum is expected to continue for the next few months.

The group is expected to release its fourth quarter (4Q) FY15 results on Wednesday. We expect the group to register a net profit of between RM9 million and RM11 million, assuming the CPO selling price is similar to the spot price. Note that the average CPO spot price for the quarter was RM2,220 per tonne, which remained stagnant compared with 3QFY15. 

On a y-o-y basis, the price has decreased 17.5%. Meanwhile, palm kernel prices stood at RM1,779 per tonne (+19.2% quarter-on-quarter [q-o-q], - 25.3% y-o-y). Overall, FY15 net profit is expected to be RM46 million to RM48 million (compared with FY14 net profit of RM65.8 million). The drop in net profit is attributed to lower average CPO price (-9.7% y-o-y).

We like United Malacca as the group’s palm oil trees have one of the youngest age profiles (approximately eight years old). As oil palms typically enter their prime FFB yield cycle at eight to 15 years old, there is still plenty of room for production growth of these young trees. As at the end of FY14, about 48% or 10,670ha of palm trees are between eight and 15 years old, considered as prime age category. Out of the 22,336ha of planted area, about 17% is four to seven years old. Meanwhile, immature land (<4 years old) accounts for about 29% of total planted area. 

We expect FFB production for FY16 to increase 2.5% to 350,000 tonnes and 396,000 tonnes for FY17. Meanwhile, we have adjusted our FY16 CPO assumption to RM2,327 per tonne from RM2,624 per tonne previously. CPO assumption for FY17 remained unchanged at RM2,723 per tonne. All in, FY16 and FY17 profit forecasts have been downgraded by 27.6% and 0.2%, respectively. — TA Securities, June 23

This article first appeared in The Edge Financial Daily, on June 24, 2015.