STOCK FOCUS OF THE DAY
IJM Plantations : Dragged by falling CPO prices but remains a long-term cash cow HOLD
We are downgrading IJM Plantations (IJMP) from BUY to HOLD with a lower fair value of RM3.40/share vs. RM3.90/share previously. Our fair value implies a FY18F PE of 22x. Our PE assumption of 22x for IJMP is 12% below our PE assumption of 25x used to derive Kuala Lumpur Kepong's fair value of RM25.70/share. We have reduced our PE assumption on IJMP's fair value from 27x to 22x as CPO prices are falling. Hence, there is no catalyst for a valuation re-rating. IJMP's long-term earnings growth would depend on enhancements in operational efficiencies and CPO price as the group has completed plantings on almost all of its landbank in Indonesia. IJMP has plantable land of only 2,000ha left in the country. We have raised IJMP's FY18F net profit by 7% to account for higher FFB production growth, which is expected to translate into lower production cost per tonne and improved operating profit margin.
We forecast IJMP's FFB output to grow by 14% in FY18F compared with a 1.7% decline in FY16 and a 1.7% increase in FY17. IJMP's FFB yields are expected to improve in FY18F after being affected by the lagged impact of El Nino in FY17. Previously, we assumed that IJMP's FFB production would expand by 12% in FY18F. Indonesia is expected to drive IJMP's FFB production in FY18F. We believe that IJMP's FFB production in Indonesia would climb by 20% in FY18F. Indonesia is anticipated to account for almost 40% of IJMP's FFB production in FY18F vs. 33% in FY17F. IJMP’s capex is expected to be RM180mil in FY18F before falling to RM140mil in FY19F. As such, IJMP's free cash flows are estimated to be 12.0 sen per share in FY19F vs. 5.9 sen per share in FY18F. On the back of rising cash flow, we reckon that there is potential for higher dividend payments in the future. Currently, we assume gross DPS of 5 sen in FY17F and 7 sen in FY18F, which translate into yields of 1.6% and 2.2% respectively.
Heineken Malaysia : Fine showing but elevated valuations HOLD
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