19/06/2013 (Borneo Post) - IJM Plantations Bhd (IJM Plantations) continues to be disadvantaged by a RM100 per tonne price discount for its crude palm oil (CPO) sold in Sabah but there are positive signs that will be a short-term improvement in CPO prices over the next few months.

According to RHB Research Institute Sdn Bhd (RHB Research) in a report on the group, IJM Plantations continues to have to sell its CPO in Sabah to refineries at a RM100 per tonne discount to market prices.

This is due to demand still being weak and the impact of the new CPO export tax regime in Malaysia.

The new export tax regime has resulted in pure planters like IJM Plantations, particularly in Sabah (where the refinery capacity of 7.5 million tonnes outweighs the CPO production of the state of 5.8 million tonnes) having to absorb the equivalent of the export tax amount (currently at 4.5 per cent) when selling to domestic refineries.

IJM Plantations continues to sell mostly on the spot market, given the current lackluster CPO prices.

However, the company believes CPO prices could have a short window of opportunity to strengthen in the next few months, given its view that FFB production in the 2HCY13 could be weaker on a y-o-y basis, and is hoping for CPO prices to range between RM2,400 to 2,500 during this period.

Bearing this in mind, IJM Plantations’s year-end stock levels for the financial year ending March 2013 (FY03/13) are slightly higher than usual, as the company hopes to take advantage of higher prices in the short term.

Adding to that, the company’s growing contributions from its Indonesian plantations would also help to offset the weak price factor, as FFB production in Indonesia is expected to double in financial FY03/14 and then triple in FY15.

The research house also highlighted that year to date (YTD), May production in Malaysia rose a significant 45.3 per cent y-o-y, but growth is expected to moderate as this is from a low base in April and May 2012, which saw production negatively affected by delayed El Nino effects.

With a normalisation of cropping patterns this year, the company expects the strong growth to moderate in the latter half of 2013, projecting fresh fruit bunch (FFB) production to fall about five to seven per cent y-o-y during this period.

“Based on this projection, management expects FFB production growth in Malaysia for FY03/14 to remain relatively flat y-o-y,” RHB Research noted.

“However, given the 45 per cent YTD growth thus far, we believe this may be too conservative an assumption, and project Malaysian FFB growth at 4.3 per cent instead (up slightly from our previous assumption of 2.4 per cent) for FY03/13.”

“For FY03/14 to FY03/15, we project FFB growth of zero to one per cent pa from Malaysia, given its replanting activities of 700 to 800 acres a year,” the research house added.

More notably, IJM Plantations has been planting up its Indonesian landbank more aggressively over the last three years, planting up 6,000-8,000ha per year. As at end-FY03/13, IJM Plantations had planted close to 27,500 hectares (ha) of land in Indonesia, with 3,761ha already matured, producing 55,000 tonnes of FFB.

The research house speculated that over the next two years, between 4,000 to 5,000ha of landbank would mature every year, thereby more than tripling its current FFB production in Indonesia by end-FY06/15.

“We now project the group’s total FFB production growth at 12.1 per cent for FY03/14 (up from 11.6 per cent), followed by nine to 11 per cent growth for FY03/14-15 (from 10-12 per cent).”

IJM Plantations’s Indonesian plantations are projected to contribute about 14 per cent to total group production in FY03/14 (from eight per cent in FY03/13), before rising to 21 per cent in FY03/15 and 28 per cent in FY03/16.

“Given the fast pace of planting over the last few years, the ‘easier’ areas with the relevant permits have mostly all been planted up already, and as such IJM Plantations has a lower new planting target of 3,000ha for FY03/14.”

While there is still another 7,000 to 8,000ha of land left to be planted, including a relatively new acquisition of 4,620ha which has not been cleared yet. Assuming 2,000 to 3,000ha of land is planted up every year from FY03/14, IJM Plantations would have exhausted all its Indonesian landbank by FY03/16.

At this current juncture, the RHB Research explained that the company does not have any major ongoing negotiations for new landbank acquisitions, preferring to focus on ramping up production first.