13/09/2011 (Borneo Post) - A ‘boutique’ oil palm agribusiness company, IJM Plantations Bhd’s (IJM Plantations) capital expenditure (capex) for financial year 2012 ending March (FY03/12) has risen to RM340 to RM440 million, likely due to the higher new planting cost of RM15,000 to RM20,000 per hectare.

“Although this cost is to be spread over the three year period to maturity, we note that the bulk (60 to 65 per cent) of these costs were borne in the first year of planting, which would explain the higher capex guidance for FY03/12,” said RHB Research Institute Sdn Bhd (RHB Research) in a note yesterday.

“We have therefore imputed the higher capex guidance for FY03.12 into our forecast. For FY03/12 and beyond however, management indicated that capex would go back to about RM200 million per year, in line with our forecast,” it added.

On the financial front, IJM Plantations recorded a strong recovery in fresh fruit bunch (FFB) production year-to-date (YTD) in the fourth month of FY03/12, registering a growth of 18.9 per cent year-on-year (y-o-y). The group highlighted that this strong growth was not expected to last for the rest of the FY, as it believed the June/July month to be the peak crop months for the year.

In August, FFB production was flat, while September’s crop had started to taper off. This was partially due to the festive period of Ramadan and Hari Raya, and also to the delayed effect of the La Nina phenomenon, which generally affects fruit yields five to six months later (June-September 2011) and 10 to 12 months later (January-March 2012), due to a potential bunch failure caused by poor pollination or lower light intensity affecting photosynthesis.

Despite this, the group still expected production in the third quarter of FY03/12 (September-December 2011) to be higher y-o-y, given the low base of 3QFY03/11. Overall for FY03/12-13, the company was expecting FFB production growth to be in the region of seven per cent to eight per cent per annum.

“As for crude palm oil (CPO) prices, management continues to remain conservative, maintaining its view that it is happy with the current price levels. We believe it has, as per its policy, sold part of its FY12 production forward already, at prices around RM3,000 per tonne, although no quantum was revealed,” said RHB Research.

Given current price levels of RM3,000 to RM3,100 per tonne, IJM Plantations should be able to meet the research firm price forecast of RM3,000 per tonne for FY03/12.

In terms of costs, IJM Plantations’ average production cost was around RM1,100 to RM1,200 per tonne in FY03/11, while production cost excluding PK credit was around RM1,500 to RM1,600 per tonne.

“Going forward, management expects production cost for FY03/12 to be about five to 10 per cent higher y-o-y, despite having locked in about 75 per cent of its fertiliser requirements for FY12 already at prices similar to FY03/11. This would come from the remaining unhedged fertiliser requirements and an expected increase in labour cost of between five and 10 per cent per annum,” said the research firm.

Notably, IJM Plantations was not under any obligation to comply with the recent agreement made by the Malayan Agriculture Producers Association (MMPA) to raise the wages of plantation workers by 10 per cent or RM200 per month. “This is because plantation companies in East Malaysia are not actually members of MAPA and as such, are not bound by its guidelines,” RHB Research highlighted.

However, IJM Plantations acknowledged that in order to be competitive, it would eventually had to raise wages of its plantations workers, which was why it projected labour costs to increase between five to 10 per cent per annum every year. “As this is in line with our forecasts, we are maintaining our cost assumptions for FY12-13,” the research firm added.

“All in, we revised our earnings forecasts down by 1.2 per cent for FY03/12 and up by 5.1 per cent for FY03/12 and 0.7 per cent for FY03/12, after taking into account the changes in capex assumptions and updating for the FY03/11 annual report,” RHB Research stated.

IJM Plantations’ stock remained favourable for the research firm as it pegged its fair value at RM2.90 per share, based on unchanged target price earnings ratio of 14 times calendar year 2012 earnings.