Poor earnings outlook seen for next three years
PETALING JAYA: Amid poor earnings outlook for IJM Plantations Bhd for the next three years, Affin Hwang Capital Research has cut its target price while reaffirming its “sell” call on the counter.
The brokerage said its new target price for IJM Plantations is now RM1.51, down from the previous target of RM1.88, based on lower earnings forecasts for the financial years (FY) ending March 31, 2019 to 2021.
“We are cutting our earnings forecasts for FY19-FY21 by 11%-41%, mainly to take into account a lower fresh fruit bunch (FFB) and crude palm oil (CPO) production growth rate and our higher production-cost assumption,” Affin Hwang Capital said in a report.
“Given our earnings cuts, which are slightly offset by a higher target price-earnings ratio (PER) of 23 times applied to our 2019 estimated core earnings per share (EPS), we lower our 12-month target price to RM1.51 (from RM1.88) and reaffirm our ‘sell’ rating,” it explained.
It pointed out that the new PER for IJM Plantations was based on the plantation sector average PER. It previously applied a PER of 22 times on the counter.
According to Affin Hwang Capital, the logistics issue at IJM Plantations’ East Kalimantan estate in Indonesia had delayed harvesting and if the situation were to persist, there could be major crop losses.
“There were insufficient barges to carry the CPO to the refineries and, meanwhile, oil storage tanks are full. Hence, there were days that IJM Plantations had to stop harvesting as they were unable to process the FFB,” it explained.
On that note, Affin Hwang Capital said it had lowered its FY19 FFB production assumption for IJM Plantations to 470,000 tonnes from its earlier forecast of 500,000 tonnes in Malaysia, and to 500,000 tonnes from its earlier forecast of 520,000 tonnes in Indonesia.
In addition, it expected IJM Plantations’ production costs to be higher in FY19, mainly due to the Malaysian operations as labour costs has increased and production was tracking lower than expected.
To note, the minimum wage in Malaysia is set to rise to RM1,050 starting Jan 1, 2019, from RM1,000 in Peninsular Malaysia and RM920 in East Malaysia.
IJM Plantations’ CPO production cost in Malaysia for FY19 could potentially climb to RM1,800-RM1,900 per tonne from around RM1,650 per tonne in FY18, while its Indonesian production cost would likely remain stable at RM2,100-RM2,200 per tonne, according to Affin Hwang Capital.
Meanwhile, CPO prices are expected to improve in the coming months, the brokerage said.
IJM Plantations’ CPO average selling price (ASP) for Malaysia was around RM2,325 per tonne while that for Indonesia was at RM2,000 per tonne in the first half of FY19.
“Prices of most vegetable oils have been under pressure with the improvement in global production, including palm oil, as well as trade tensions between the US and China,” Affin Hwang Capital said.
“Our CPO ASP forecast for IJM Plantations is at RM2,250-RM2,450 per tonne for FY19-FY21 from RM2,532 per tonne in FY18,” it added.