20/12/2017 (The Edge Markets MY) - United Malacca Bhd
(Dec 19, RM6.50)
Revised to market perform rating with a lower target price (TP) of RM6.80 per share: United Malacca Bhd’s (UMCCA) first half of 2018 (1H18) core net profit (CNP) of RM21.4 million came in below both consensus and our forecasts at 27% and 29% respectively, on higher-than-expected unit cost from newly matured areas. An interim dividend of six sen was announced, missing our 23 sen estimate. We reduce our financial year 2018 estimated (E) to FY19E CNP by 12% to 1% and revise our call to “market perform” with a lower TP of RM6.80 (from RM7.15), based on an unchanged 20.4 times forward price-earnings ratio (PER).

UMCCA’s 1H18 CNP at RM21.4 million came in under the consensus RM79.2 million forecast at 27% and below our RM75.1 million estimate at 29%, owing to higher-than-anticipated production cost per tonne, coming from newly matured Indonesian and Malaysian areas. We note that fresh fruit bunch production at 181,600 tonnes is in line with our expectations at 49%. An interim dividend of six sen was announced, which we deem below expectations as it made up 26% of our full-year estimate, and declined 25% against the last three years’ 1H dividend payout of eight sen. However, we expect to see a higher dividend declared in 2HFY18, in line with historical payout patterns. 

Year-on-year, CNP softened 25% on thinner margins due to newly maturing areas in both Malaysia (1,700ha; about 8% of planted areas) and Indonesia (3,000ha; about 26% of planted areas), which resulted in a lower profit before tax in Malaysia (-21%) and wider loss before tax (LBT) in Indonesia to RM2 million (from RM200,000). This was compounded by lower palm kernel (PK) prices (-12%), although higher crude palm oil prices (+3%) and FFB volumes (+8%) partly stemmed the decline. Quarter-on-quarter, CNP jumped 120% as Malaysia’s contribution doubled on the back of stronger FFB production (+18%) and PK prices (+22%). Indonesian LBT was unchanged at RM1 million due to the high volume of low yielding newly matured areas. 

We continue to expect double-digit FFB growth for the full year at 16%, well exceeding the sector average of 8%. With a better second-half growth outlook, we think unit costs should see slight improvements, albeit management guidance that higher FFB production would not translate into proportionately higher profit due to the higher cost of production. We also look forward in calendar year 2018 to seeing initial progress towards the development of UMCCA’s newly acquired Sulawesi area intended for expansion of non-palm cash crops, such as stevia, coffee, cocoa or coconut, which should reduce earnings volatility due to palm oil’s seasonality and price movements. 

We reduce FY18 to FY19 CNP by 12% to 1% to RM66.2 million to RM71.5 million on updated cost assumptions due to newly matured areas.

We update to “market perform”, with a lower TP of RM6.80 (from RM7.15) on a lower calendar year 2018 estimated earnings per share of 33.3 sen (from 35.1 sen) post earnings adjustments. Our forward PER is unchanged at 20.4 times, based on +0.5 standard deviation (SD) valuation basis. This is in line with planters with above-average FFB growth outlook. While we continue to see positive long-term prospects for UMCCA, given the growth potential of its significant young mature areas as well as earnings diversification plans, we think the market has priced in the medium-term growth potential in view of the strong share price performance to-date (+13%). Thus, we revise our call to “market perform” (from “outperform”) in line with our rating definition. — Kenanga Research, Dec 19