12/03/2012 (Borneo Post) - United Malacca Bhd (United Malacca), a plantation company with oil palm estates in West Malaysia and Sabah, is expected to see a boost in its fresh fruit bunch (FFB) production and sustainable growth due to near optimally aged trees moving forward.

Kenanga Investment Bank Bhd (Kenanga Investment) in a stock coverage report expected United Malacca’s FFB production to increase from about 254,913 metric tonnes (mt) for financial year 2011 (FY11) to 352,407mt (FY14 estimate), representing a strong 38 per cent growth or three-year cumulative annual growth rate (CAGR) of 11 per cent.

“As United Malacca’s average tree age profile is only 7.3 years old (as of end-FY11), investors can look forward to sustainable FFB growth in the next three to five years as oil palm trees production normally peaks at the age of 10 to 12 years old.

“We like United Malacca for its steady FY12 to FY13 estimated FFB growth of 20 and 12 per cent, its high FY13 estimated dividend yield of 4.6 per cent (best among its peers), high sensitivity to CPO prices, attractive valuation and possible near-term land banking exercise in Indonesia in view of its depleting plantable reserves, the research house elaborated.

After increasing its plantation land bank by 72 per cent in December 2009, United Malacca was poised to ride the strong FFB growth which was notably higher than most of the planters under Kenanga Investment’s coverage, which had FFB growth rate of between two to nine per cent.

The research team estimated the FY12-13 core net profit at RM95 million and RM112 million, representing a strong 17 to18 per cent year-on-year (y-o-y) growth. It also expected generous net dividends of 28 to 33 sen, representing net dividend yields of 3.9 to 4.6 per cent.

This was higher than other planters’ net dividend yields, which ranged from 1.3 per cent to 3.9 per cent.

In Kenanga Investment’s analysis, the planter’s key earnings catalysts were better than expected CPO prices and higher than expected FFB growth, noting that 100 per cent of the planter’s operating profit was derived from its oil palm division, hence its pure exposure to a CPO price upside.

United Malacca is a good proxy to crude palm oil (CPO) prices upside as its FY13 estimated core net profit should increase 4.5 per cent for every RM100 increase in CPO prices, based on the research team’s estimate.

Meanwhile, the immediate term risks were sustained drop in CPO prices and regulatory risk in Sabah in that 16,971ha (70 per cent) of the company’s estates are located in Sabah where sales tax on CPO sales had been raised, currently stands at 7.5 per cent. Any further increase there would be detrimental to the company’s earnings, Kenanga Investment stated.

The planter’s enterprise value (EV) per planted hectare (ha) of circa RM69,900 was one of the lowest among planters under Kenanga Investment’s coverage which was “unwarranted in our view as 75 per cent of its 19,066ha of its planted land are mature with FFB yield of 17.7mt per ha in FY11”.

The research house thought that the company’s new maturing Sabah plantation estates justified a rerating as mature Sabah plantation land traded at about RM80,000 per ha, which was 14 per cent higher than RM69,900.

“We believe United Malacca may expand its plantation land into Indonesia given the cheaper land price there and the need to secure more landbanks for longer-term growth.

“As of end-FY11, United Malacca has only unplanted land of 2,319ha left (or 10 per cent of its total landbank), which we expect will be fully planted latest by FY14.

“With its strong balance sheet and net cash of RM157 million and the historical preference of greenfield land, we think United Malacca can still invest up to RM30 million in acquiring greenfield land,” the research team said.

A recent joint venture for sizeable greenfield plantation land development in East Kalimantan indicated land value price of about RM1,200 per ha, hence giving United Malacca the opportunity to expand its greenfield land aggressively by up to 25,000ha.

Kenanga Investment initiated coverage on the stock and pegged a target price of RM7.70 based on 14 times forward price earnings on its FY13 estimated earnings per share of 55 sen.