IJM Plantations : Long-term cash cow? HOLD

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IJM Plantations : Long-term cash cow?   HOLD

Maintain HOLD on IJM Plantations (IJMP) with an unchanged fair value of RM3.30/share, which implies a FY18F fully diluted PE of 25x. As there are only eight months left in IJMP's financial year, we have applied the PE on the group's FY18F EPS instead of FY17F. 

We have reduced IJMP's FY17F net profit by 10.9% to account for weaker FFB production and gross profit margin. We are now assuming that IJMP's FFB production would grow by 5.6% in FY17F vs. more than 10% previously. The group's FFB output contracted by 15.9% YoY in 1QFY17. IJMP could turn into a cash cow in the long-term on the back of a decline in capex. The group only has plantable land of 3,000ha left in Indonesia. In addition, we do not expect IJMP's refining joint venture with KL Kepong in East Kalimantan to commence construction anytime soon. We estimate the group's free cash flow at 3.9 sen per share in FY17F vs. (-15.2) sen per share in FY16. Capex is assumed at RM162mil in FY17F compared with RM190.6mil in FY16. We have also forecast IJMP's gross cash to rise by 36.5% from FY16 to RM372.6mil in FY19F. 

We believe that the group's FY17F FFB production would inch up by 4.0% in Malaysia and 13.6% in Indonesia. Indonesia accounted for 43% of IJMP's FFB output in FY16.

The enhancements in FFB output in Indonesia are expected to be underpinned by an increase in mature areas of 3,000ha. This in turn is anticipated to be driven by aggressive plantings that IJMP carried out from FY10 to FY15. Average size of new plantings was 5,564ha during the six-year period. IJMP's production cost per tonne in Malaysia is expected to increase from RM1,570 in FY16 to RM1,600 in FY17F on the back of inflationary pressures such as minimum wage and diesel. In Indonesia, the group's production cost may decline from RM2,000/tonne in FY16 to RM1,800/tonne in FY17F underpinned by a 13.6% expansion in FFB production. We understand that the weather is mixed at IJMP's oil palm estates in Indonesia currently. Certain regions are facing dry weather as rains have been insufficient. In spite of this, the group's FFB production in Malaysia and Indonesia are still expected to peak in late-3QFY16 to early-4QFY16.

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