PLANTATION IJM PLANTATIONS (IJMP MK, IJMP.KL) 4 July 2012 Company report Gan Huey Ling, CFA gan-huey-ling@ambankgroup.com 03 2036 2305 Earnings recovery in FY14F Rationale for report: Company Update BUY (Maintained) Price Fair Value 52-week High/Low Key Changes Fair value EPS RM3.24 RM3.65 RM3.42/RM2.38 Investment Highlights Maintain BUY on IJM Plantations (IJMP), with an unchanged fair value of RM3.65/share based on a PE of 16x on FY14F basic EPS. IJMP s PE band ranged from a low of 6x to a high of 28x in the past seven years. Mean PE was 18x. YE to Mar FY12 FY13F FY14F FY15F Revenue (RMmil) 590.4 714.1 745.0 791.8 Net Profit (RMmil) 157.3 162.0 182.5 193.6 EPS (sen) 19.6 20.2 22.8 24.2 FD EPS (sen) 18.6 19.1 21.4 22.7 EPS growth (%) 6.8 3.0 12.6 6.1 Consensus net (RMmil) - 185.3 199.9 226.2 DPS (sen) 10.0 11.0 13.0 14.0 PE (x) 16.5 16.0 14.2 13.4 FD PE (x) 17.5 17.0 15.1 14.3 EV/EBITDA (x) 10.2 10.1 9.2 8.8 Div yield (%) 3.1 3.4 4.0 4.3 Stock and Financial Data Shares Outstanding (million) 801.7 Market Cap (RM mil) 2,597.5 Book value (RM/share) 1.73 P/BV (x) 1.9 ROE (%) 11.7 Net Gearing (%) na Major Shareholders IJM Corporation (55%) EPF (12%) Free Float (%) 45 Avg Daily Value (RMmil) 2.5 Price performance 3mth 6mth 12mth Absolute (%) -3.9 +13.3 +17.5 Relative (%) -3.9 +6.8 +15.7 Although IJMP s PE valuations are almost similar to Genting Plantations, IJMP offers higher dividend yields of 3.2% to 3.3%, according to Bloomberg consensus estimates. In contrast, GenP s FY13F-FY14F dividend yields are 1.6% to 1.7%. We believe that IJMP s net profit would rebound by more than 10% in FY14F from a relatively flat FY13F. Profit growth in FY14F is envisaged to be driven by a recovery in FFB production in Sabah and a two-fold surge in FFB output in Indonesia. Production costs in Malaysia are forecast to remain stable, below RM1,400/tonne in FY14F. The recent fall in crude oil prices should soften fertiliser costs, while labour costs are expected to stabilise after the implementation of the pay increment/minimum wage in late-2011. We reckon that IJMP s new palm oil mill in Kalimantan would also be relying less on external FFB for its requirements in FY14F. As such, operating margin of the mill should improve in FY14F, aided by a lower cost of FFB purchases. We believe that the new mill would enjoy a greater volume of internal FFB in FY14F. IJMP s FFB production in Indonesia is expected to surge 122% to more than 100,000 tonnes in FY14F underpinned by an expansion in mature areas. IJMP s FY13F pre-tax profit is anticipated to be flat, due to a fall in palm oil production in Sabah and higher production costs. Overall, we estimate that IJMP s FFB production would shrink 1.6% in FY13F. Although the group s FFB output in Sabah is forecast to ease 5%, this would be partly compensated by a 105% increase in FFB production in Indonesia. IJMP s FFB output in Indonesia is estimated at 45,000 tonnes in FY13F compared to 22,000 tonnes in FY12. PP12247/06/2013(032380) IJMP s new palm oil mill in Kalimantan is envisaged to be completed in 3Q2012, coinciding with the peak palm oil output season in Indonesia and Malaysia. The mill would be sourcing FFB mainly from third parties in FY13F, as IJMP s FFB output is not large enough yet. IJMP s new palm oil mill is expected to command a capacity of 70 tonnes/hour. The cost of the palm oil mill is about RM70mil.
TABLE 1 : VALUATION COMPARISONS @ 29 JUNE 2012 Malaysian comparisons PE (x) ROE (%) Dividend Yield (%) FY12F FY13F FY14F FY12F FY13F FY14F FY12F FY13F FY14F Large-caps (>RM10bil) IOI Corporation 16.4 14.8 14.1 16.2 16.4 15.8 3.2 3.4 3.7 KL Kepong 17.6 16.3 15.8 18.8 18.5 17.8 3.4 3.6 3.8 Sime Darby 14.7 13.8 13.1 15.9 15.6 15.0 3.4 3.6 3.7 Simple average 16.3 14.9 14.3 17.0 16.8 16.2 3.3 3.5 3.7 Medium-caps (>RM3bil) Genting Plantations 15.6 14.1 13.6 13.0 12.4 12.1 1.6 1.6 1.7 Kulim 13.4 12.5 12.0 11.6 9.5 9.0 1.1 1.5 2.1 United Plantations 14.4 13.1 13.9 18.7 18.5 14.5 4.1 4.3 4.0 Simple average 14.5 13.3 13.1 14.4 13.5 11.9 2.3 2.5 2.6 Small-caps (>RM1bil) IJM Plantations 13.9 14.0 13.1 13.8 12.3 12.3 2.8 3.2 3.3 TH Plantations 9.4 9.1 8.9 17.8 17.7 16.9 5.3 5.7 6.0 TSH Resources 15.3 12.9 11.4 14.0 14.4 14.2 1.9 2.1 2.4 Sarawak Oil Palms 11.3 9.6-16.9 17.5-0.8 1.0 - Tradewinds Plantation 9.9 8.5 7.9 15.2 15.6 14.7 3.3 4.0 3.9 Hap Seng Plantations 10.2 9.4 9.1 11.5 11.9 11.9 4.8 6.8 6.9 Simple average 11.7 10.6 10.1 14.9 14.9 14.0 3.1 3.8 4.5 Source: Bloomberg MAINTAIN BUY WITH UNCHANGED FAIR VALUE OF RM3.65/SHARE We are keeping our BUY recommendation on IJM Plantations Bhd (IJMP), with an unchanged fair value of RM3.65/share. Our fair value is based on an FY14F PE of 16x. We believe that investors should look forward to an earnings recovery in FY14F. We reckon that IJMP s FY13F earnings would not be exciting due to a fall in palm oil production. As such, we have downgraded IJMP s FY13F earnings by 9%. In FY14F, IJMP s FFB production in Indonesia would start to surge, underpinned by an expansion in mature areas. In addition, the group s new palm oil mill in Kalimantan is expected to perform better on the back of larger economies of scale. Dividend yields are envisaged to be decent. We forecast a gross DPS of 11 sen for FY13F and 13 sen for FY14F, which suggest yields of 3% to 4%. IJMP s current foreign shareholding ranges from 4% to 5%. VALUATIONS RELATIVE TO PEERS IJMP s PE on par with peers but dividend yields are slightly higher IJMP s PE valuations are undemanding. According to Bloomberg consensus estimates, IJMP s FY13F-FY14F PEs are 13x-14x, which are relatively in line with the simple average PE of the medium-cap planters of 13x (see Table 1). IJMP s nearest comparison is Genting Plantations (GenP). While the PE valuations of both companies are almost similar, IJMP has higher dividend yields. According to Bloomberg, IJMP s dividend yields are forecast at 3.2% to 3.3% for FY13F to FY14F. In comparison, GenP s PE dividend yields are 1.6% to 1.7% (see Table 1). IJMP s dividend payouts are high. In the past three years, the group s net dividend payouts ranged from 44% to 51%. EARNINGS RECOVERY IN FY14F FY14F net profit forecast to improve 13% We expect IJMP s net profit to recover 13% in FY14F after stagnating in FY13F on the back of a rebound in FFB production. Production costs are also envisaged to remain stable aided by flattish fertiliser costs. AmResearch Sdn Bhd 2
CHART 1 : INTERNAL FFB PRODUCTION (TONNES) Source: Company, AmResearch Recovery in FFB production in Sabah in FY14F We expect group FFB production to expand 14% in FY14F (see Chart 1), underpinned by a recovery in FFB yields in Sabah and surge in output in Indonesia. We have assumed that IJMP s FFB output in Sabah would improve 6% in FY14F. In Indonesia, IJMP s FFB production is envisaged to climb from 45,000 tonnes in FY13F to more than 100,000 tonnes in FY14F on the back of an increase in mature areas. As at March 2010, IJMP s immature areas in Indonesia measured 5,306ha. In FY11, immature areas totalled 13,043ha. We reckon that Indonesia would account for 7% of IJMP s FFB production in FY13F and 13% in FY14F. Smaller FFB purchases in Kalimantan in FY14F Due to the jump in IJMP s FFB production in FY14F, the group s new palm oil mill in Kalimantan would be less reliant on external purchases. The decline in FFB purchases would help improve operating margins. We estimate that IJMP s own FFB production would account for 50% of the mill s requirements in FY14F versus 14% in FY13F. In Malaysia, the price of FFB is about 20% of CPO s price. FFB price is about RM650/tonne to RM700/tonne currently. Milling margins in Sabah range from RM20/tonne to RM25/tonne. Production costs in FY14F to remain stable We believe that operating costs per tonne would remain stable, i.e. below RM1,400/tonne, in FY14F. We reckon that fertiliser costs would be soft, in line with the downward trend in crude oil prices in the past couple of months. Since the start of the year, crude oil prices have declined 17.5% to US$84.96/barrel as at 29 June. This would benefit plantation companies, including IJMP, which would be locking in fertiliser supply for the calendar year 2013. Labour costs are envisaged to remain stable in calendar year 2013 or FY14F for IJMP. We believe that there would not be any huge increase in wages after the implementation of the minimum wage or pay increment in late-2011. Larger economies of scale resulting from a recovery in CPO production in Sabah would also help keep a lid on IJMP s operating costs per tonne in FY14F. FY13F PRE-TAX EARNINGS TO BE RELATIVELY FLAT FY13F pre-tax profit envisaged to be flat We expect IJMP s pre-tax profit of RM216mil in FY13F to be relatively unchanged from FY12 s RM215mil. Although the group would achieve a higher average CPO price realised in FY13F, this would be offset by a slight decline in palm oil production and an increase in operating costs. AmResearch Sdn Bhd 3
Fertiliser costs are expected to rise 15% to 20% in FY13F, while labour costs could increase by 10%. IJMP is also envisaged to record higher costs of purchases of FFB from third parties in FY13F, as its palm oil mill in Kalimantan would be completed in 3Q2012. IJMP s FFB production in Sabah to fall 5% in FY13F On a group basis (including Indonesia), we expect IJMP s FFB production to ease 1.6% in FY13F (see Chart 1). We have assumed that IJMP s internal FFB production in Sabah would decline 5% in FY13F. However, this would be compensated by the group s FFB production in Indonesia, which would be at an estimated 45,000 tonnes in FY13F versus 22,000 tonnes in FY12. The slide in IJMP s palm oil production in Sabah in FY13F is mainly due to lagged impact of the hot and dry weather, which took place in 2010. Additionally, IJMP s FFB production was robust in FY12, as reflected in the increase of 16.6%. Excluding contributions from Indonesia, IJMP s FFB output would have risen by 12.8% in FY12. Coming from a high base in FY12, IJMP s FFB output growth in FY13F would naturally soften. Compared to other plantation companies, e.g. Kuala Lumpur Kepong and Genting Plantations, IJMP s FFB production in Indonesia is not significant in FY13F yet. Hence, while the other planters have the benefit of their Indonesian production compensating fully for a decline in output in Sabah, IJMP does not. In FY13F, Indonesia is expected to account for 7% of IJMP s internal FFB production compared with 3% in FY12. Production costs to be below RM1,400/tonne IJMP s production cost is expected to be at RM1,350/tonne in FY13F. In spite of rising labour and fertiliser costs, IJMP would strive to keep its operating costs below RM1,400/tonne. Labour accounts for about 20% of IJMP s production costs, while fertiliser accounts for another 21% to 22%. Going forward, there is a likelihood that fertiliser costs would stabilise in the next calendar year, in line with the recent weakness in crude oil prices. In 1Q2012, most plantation companies indicated that labour costs had climbed about 10%, while fertiliser costs had increased 15%-20%. Also, most plantation companies had applied a higher volume of fertiliser, which added to the increased cost. Replanting 800ha in FY13F IJMP is expected to replant 800ha of oil palm trees in FY13F compared with 500ha in FY12. Based on a replanting cost of RM12,000/ha, we estimate replanting cost at RM10.4mil in FY13F. As at end-march 2011, about 8% or 1,980ha of IJMP s oil palm trees in Sabah were more than 20 years old. UPDATES ON CURRENT INDONESIA OPERATIONS New mill in Kalimantan to be completed in 3Q2012 IJMP s new palm oil mill in Kalimantan is scheduled to be commissioned in 3Q2012. This would coincide with the peak output season for palm oil. IJMP would be relying substantially on external fruits for the mill s FFB requirements, as its own FFB production is not sufficient yet. Going forward, as IJMP enjoys a higher volume of FFB production from its own estates, the palm oil mill would depend less on FFB purchases. This would help improve operating margins. IJMP s palm oil mill in Kalimantan is expected to command a production capacity of 70 tonnes/hour. The cost of the palm oil mill is about RM70mil. The new palm oil mill is not the same as conventional palm oil mills as it would have a different effluent system. To plant about 5,000ha in Kalimantan each year We estimate that new plantings of 5,000ha would cost the group about RM80mil each year. We reckon that IJMP would have planted areas of 32,000ha in Indonesia by FY14F. This would provide the kicker to the group s next leg of growth. Presently, IJMP has total landbank of 71,000ha in Indonesia. Out of these, about 22,000ha is already planted. Out of the balance 49,000ha, about 35,000ha is plantable land. IJMP s oil palm trees in Indonesia are young IJM s oil palm trees in Indonesia are young. As at end- March 2011, about 96% of the trees or 13,606ha were between one and three years old. The balance 4% of the trees was more than eight years old. In Malaysia, roughly 78% of the planted areas were between eight and 20 years old while another 10% of the oil palm trees were between four and seven years old. About 8% of the trees were more than 20 years old, while the balance 4% was less than three years old. IJMP is expected to step up its replanting initiatives going forward. Currently, the average of the group s oil palm trees in Sabah is about 13 years old. AmResearch Sdn Bhd 4
TABLE 2 : FINANCIAL DATA Income Statement (RMmil, YE 31 Mar) 2011 2012 2013F 2014F 2015F Revenue 506.3 590.4 714.1 745.0 791.8 EBITDA 146.3 187.0 181.3 205.9 217.6 Depreciation 28.0 29.3 29.2 34.0 38.7 Operating income (EBIT) 174.3 216.3 210.5 239.9 256.2 Other income & associates 16.9 10.3 10.8 11.3 11.9 Net interest 4.9 6.9 (5.1) (7.7) (9.7) Exceptional items 0.0 (18.2) 0.0 0.0 0.0 Pretax profit 196.0 215.2 216.2 243.5 258.4 Taxation (48.8) (57.8) (54.0) (60.9) (64.6) Minorities/pref dividends (0.0) (0.1) (0.1) (0.1) (0.2) Net profit 147.2 157.3 162.0 182.5 193.6 Core net profit 147.2 175.5 162.0 182.5 193.6 Balance Sheet (RMmil, YE 31 Mar) 2011 2012 2013F 2014F 2015F Fixed assets 494.1 608.8 683.2 751.8 798.5 Intangible assets 1.7 0.8 3.2 3.2 3.2 Other long-term assets 711.1 815.5 859.9 935.3 1,018.2 Total non-current assets 1,206.9 1,425.1 1,546.3 1,690.3 1,819.9 Cash & equivalent 203.4 315.5 217.8 149.9 101.3 Stock 62.3 66.7 58.7 61.2 65.1 Debtors 30.6 33.2 78.3 81.6 86.8 Other current assets 1.2 1.9 1.6 1.6 1.6 Total current assets 297.4 417.2 356.4 294.4 254.8 Creditors 44.6 78.7 67.2 66.6 70.8 Short-term borrowings - - - - - Other current liabilities 1.0 1.3 3.1 3.1 3.1 Total current liabilities 45.6 80.1 70.3 69.7 73.9 Long-term borrowings - 218.5 218.5 222.9 227.3 Other long-term liabilities 150.1 154.9 154.9 154.9 154.9 Total long-term liabilities 150.1 373.4 373.4 377.7 382.2 Shareholders' funds 1,306.0 1,383.9 1,457.7 1,535.9 1,617.3 Minority interests 2.3 4.2 1.3 1.3 1.3 BV/share (RM) 1.63 1.73 1.82 1.92 2.02 Cash Flow (RMmil, YE 31 Mar) 2011 2012 2013F 2014F 2015F Receipts from customers 503.9 583.2 714.1 745.0 791.8 Payments to suppliers and employees (281.8) (329.2) (432.8) (429.1) (456.1) Interest paid 0.0 (1.2) (5.0) (4.0) (3.0) Income tax paid/(refunded) (33.3) (52.5) (16.2) (18.3) (19.4) Cash flow from operations 188.9 200.3 260.2 293.6 313.4 Capital expenditure (93.8) (251.9) (200.0) (200.0) (200.0) Net investments & sale of fixed assets 0.1 0.0 0.0 0.0 0.0 Others (66.0) 9.7 (77.7) (77.7) (77.7) Cash flow from investing (159.7) (242.2) (277.7) (277.7) (277.7) Debt raised/(repaid) 0.0 217.7 0.0 4.4 20.0 Equity raised/(repaid) 0.0 1.0 0.0 0.0 0.0 Dividends paid (40.1) (64.1) (80.2) (88.2) (104.2) Others 0.0 0.0 0.0 0.0 0.0 Cash flow from financing (40.1) 154.5 (80.2) (83.8) (84.2) Net cash flow (10.9) 112.6 (97.7) (67.9) (48.6) Net cash/(debt) b/f 214.4 203.4 315.5 217.8 149.9 Forex 0.0 0.0 0.0 0.0 0.0 Net cash/(debt) c/f 203.5 315.9 217.8 149.9 101.3 Key Ratios (YE 31 Mar) 2011 2012 2013F 2014F 2015F Revenue growth (%) 24.5 16.6 20.9 4.3 6.3 EBITDA growth (%) 76.3 27.8-3.0 13.5 5.2 Pretax margins (%) 38.7 36.5 30.3 32.7 32.6 Net profit margins (%) 29.1 26.6 22.7 24.5 24.5 Interest cover (x) 128.3-33.6-25.8 35.0 26.4 Effective tax rate (%) 24.9 26.9 25.0 25.0 25.0 Net dividend payout (%) 50.4 43.6 51.0 54.4 57.1 Trade debtors turnover (days) 7 7 21 10 10 Stock turnover (days) 53 45 41 30 30 Trade creditors turnover (days) 35 26 75 30 30 Source: Company, AmResearch estimates AmResearch Sdn Bhd 5
CHART 2 : PE BAND Source: Bloomberg Published by AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15th Floor Bangunan AmBank Group 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: (03)2070-2444 (research) Fax: (03)2078-3162 Printed by AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15th Floor Bangunan AmBank Group 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: (03)2070-2444 (research) Fax: (03)2078-3162 The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd Benny Chew Managing Director AmResearch Sdn Bhd 6