Saturday, September 28, 2013

IJM Plantations : Field trip reveals a field day for earnings in FY16 (CIMB)

IJM Plantations
Current RM2.96
Field trip reveals a field day for earnings in FY16

 Our field trip helped explain the high yields for the Sabah plantations of IJM Plantations (IJMP), the mid-cap plantation arm of IJM Corp. We see rich growth prospects for its young estates in Indonesia.

Admittedly, near-term earnings are unexciting due to lower selling prices, rising costs and translation losses for its US$ debt. However, from an asset value perspective, the stock has a potential value of RM3.60-3.70 or 22-25% higher than its current price. We expect most of this value to be priced in during 2015 when its share liquidity improves and its Indonesian operations become more profitable.


Highest CPO yield among listed planters
We spent three days visiting the group's plantation operations in Sabah and concluded that its consistently high CPO yields stem from a combination of strong management (good teamwork), its estates’ prime age (average age of 13.7 years), good agricultural practices and R&D. Its average CPO yield of 5.5 tonnes/ha in FY3/13 is 45% higher than the country’s 2012 average of 3.8 tonnes/ha. Its CPO yield is also the highest among the listed planters under our coverage. This allows IJMP to generate higher profit per ha for its Sabah estates. However, last year's profitability of the group did not ranked highly against peers as it was disadvantaged by higher discount attached to Sabah's CPO and losses at its Indonesian operations.

Indonesia contribution could explode in 2015
Most of its oil palms in Indonesia were planted in FY3/11-13. Given the 3-year gestation period for oil palm estates, we expect the Indonesian operations to contribute meaningfully to the group from FY16 when more than half of its planted estates should be mature.

 Good long-term investment
At 16.3x consensus forward P/E, the stock is not cheap relative to its regional peers (average P/E of 16x) because its Indonesian operations are not profitable (due to forex loss) and CPO price is subdued. We estimate that it could be worth RM3.60-3.70 if we value its estates and facilities at their current market value.

1. BACKGROUND
1.1 Started out as a Sabah planter that..
IJM Plantation is the 55%-owned plantation arm of IJM Corp (IJM MK, Outperform) and one of the most efficient listed planters in Malaysia. It was set up in 1985 to acquire a 50% stake in Desa Talisai and develop around 4,074ha of estates. This was followed by the acquisition of Sijas Plantations (1,132ha) and Minat Teguh (2,698ha) in 1992. It acquired its largest group of estates covering 20,000ha in the Sugut region in Sabah in 1998. After achieving a certain scale, the group sought a listing on Bursa Malaysia through a reverse takeover of Rahman Hydraulic Tin. It was successfully listed on 2 July 2003.

1.2 ... spread its wings to Indonesia
The group ventured into Indonesia in 2009, after fully developing its land bank in Sabah into oil palm estates. The planted area in Indonesia has overtaken IJMP’s Malaysian planted area after just five years. However, the Indonesian operations have yet to contribute materially to earnings as most of the estates are still immature. The expansion in Indonesia has propelled the group to the league of planters with an estate size of over 50,000ha.

1.3 Upstream player with over 50k ha of planted area
The group's current total planted oil palm area stands at 52,863ha. Malaysian operations make up around 25,372ha or 48% of the total planted area while Indonesia accounts for the remaining 52%. Approximately 64% of its estates in Sabah are located in the Sugut region while the balance is in the Sandakan region. In Indonesia, the group has a total landbank of 48,071ha, which is located in the Bulungan, Kutai Timur and Lampung regions. The group owns four palm oil mills in Malaysia with a total processing capacity of 180 tonnes of FFB per hour. All the FFB output from its estates is processed by its own mills. Its mills also purchase third-party crops, which made up around 21% of the total FFB processed at its mill in FY13. In Indonesia, it successfully commissioned a 60 tonne per hour FFB mill in East Kalimantan last year.

2. VISIT TO ITS SABAH PLANTATION OPERATIONS
2.1 IJMP engagement with stakeholders - "Walk with CEO"
We recently took part in the group's stakeholders engagement programme. This is one of IJMP's initiatives to engage stakeholders from different disciplines to create awareness of the group's sustainability efforts. During the 3-day event, IJMP's hands-on CEO, Mr Joseph Tek and his team showed us the different facets of the group's operations. We were able to get a better understanding of its operations as well as challenges facing the palm oil industry. During our trip, we also dug deeper into how the group manages to consistently achieve CPO yields that are significantly higher than the country’s average (45% above Malaysia’s average in FY13) and the highest among the regional planters under our coverage (see Figure 2). We concluded from our trip and subsequent analysis that it is due to (1) its strong management team, (2) the prime-yielding age profile of its estates (average age of 13.7 years), (3) its strong agriculture practice, (4) Sabah’s more fertile soil relative to Peninsular Malaysia, and (5) its strong R&D. The other factor that differentiates IJMP from the regional planters we cover is its much smaller oil palm acreage of 25k ha in Sabah compared to the range of 35k-525k ha for regional peers under our coverage.

2.2 Day 1 – Kicking the tyres at the estates
We kicked off our journey with a 3-hour flight from KL to Sandakan. After a short briefing and mingling session at the group's HQ, we went on a 4-hour road trip to its Sugut estates. Upon arrival, we visited the jetty where CPO was being loaded onto barges for transport to its customers. We gathered that the group sells most of its CPO to two refiners in Sandakan, IOI Corp (IOI MK, Trading Buy) and Wilmar (WIL SP, Outperform). We were also taken on a short boat trip to view the mangroves along the river bank and get some crabbing experience.

2.3 Day 2.1 – Environmental and social aspects
On the second day, we visited the group's sustainability and conservation project known as the "Hundred-Acre Wood" in Sungai Sabang Estate in Sugut, which hosts an arboretum containing 40o stands of tropical rainforest tree species, 150 species of medicinal plants, tropical fruit trees and a newly set up orchid sanctuary. The group had revealed in its annual report that 8% or 5,818 acres of its landbank had been set aside for conservation purpose. This was followed by a visit to IJMP Sabang Education, a new learning centre in the Sg Sabang estate. The education centre is the fruit of its collaboration with NGO, Borneo Child Aid to provide basic education to the guest workers' children. The group currently has three learning centres which can cater for more than 500 children. We also visited the clinic and estate workers’ housing. These are all part of the group’s community building programme, which we believe will help retain as well as attract workers to its estates. Labour shortage remains a key challenge for the Malaysian palm oil industry and planters have to compete more aggressively to recruit and retain staff by improving estate workers’ housing and providing more amenities to the workers, most of whom live in the estates. We found that IJMP is less affected by labour shortages than its peers as it is still able to achieve a harvesting round of 10 to 13-day intervals.

2.4 Day 2.2.1 – Strong R&D helps to improve yields
We left Sugut and made our way to the Desa Talisai estate, the first estate that the group developed. On arrival, we were briefed on oil palm breeding, the seed programme and integrated pest management. The group started its seed production programme in 2000 and currently produces around 1m seeds per annum. Though not a big player in this area, this division helps ensure that only the best quality seedlings are planted in its estates. This will come in handy as the group has started replanting some of its estates in Sabah. We gathered that the selling price for IJMP’s DXP oil palm seed is currently RM2.10 (US$0.66) per seed.

2.5 Day 2.2.2 - Oil palm estate and mill operations
This was followed by a visit to the oil palm estate located close to its observatory tower. We climbed up the tower for a panoramic view of the group's estates and mill. We were briefed on the different harvesting tools used in the industry known as chisel, sickle and Cantas. Chisels are mainly used for younger palms while sickles are better harvesting tools for taller and older palms. Cantas is a new motorised cutter that the company is trying out in an attempt to raise the productivity of estate workers to counter labour shortages. We attempted to harvest FFBs from a young palm using the Cantas, which turned out to be a laborious affair. This showed us that harvesting activity, which is a labour-intensive affair and a critical job at the estates, is not an easy task and requires very skilled workers. The industry is currently dependent on foreign workers (mostly Indonesian) for this task. The Cantas is helpful in speeding up the harvesting task but is more prone to breakdowns due to its mechanical components, is much more expensive and is also heavier to carry around the estates than the traditional tools. It costs around RM2,500 and weighs around 7 kg. A chisel costs around RM25 or just 1% of the cost of Cantas and weighs around 1 kg.

We then visited Desa Talisai's palm oil mill where we gathered that group is investing more in its mills to meet Department of Environment (DOE)'s new ruling that effluents discharge from Sabah mills must not exceed 20ppm, a reduction from the previous ruling of 100ppm. This is a new challenge for the milling industry. We spent the rest of the day visiting the learning centre in the estate, clinic, sports complex and the group's nursery which uses drip irrigation technology. IJMP has set up a nursery in the estates, in line with its plan to replant the older palms gradually. It plans to replant 3-4% of its planted area p.a. in Sabah.

2.6 Day 3 - Mechanisation efforts
During the third day, we viewed the group’s mechanisation efforts, this time for the crop evacuation task. Currently, most planters rely on buffaloes and wheel barrows to transport the FFBs (which can weigh up to 30kg per bunch) to the roadside, after they are harvested. IJMP is trying out two motorised vehicles known as Semut and Bison, which will help speed up the fruit evacuation task and allow harvesters to focus purely on harvesting. However, we gathered that these machines work better in flat terrain estates and are quite costly. Our last stop is the water catchment area at the Minat Teguh estate. This forms part of the risk management measures during the drought season.

3. OUTLOOK
3.1 Indonesia to lead output growth and Sabah to provide cash flow
The key attraction of IJMP is its large immature and young estates in Indonesia and high-yield estates in Sabah. Approximately 86% of the 27,491ha planted estates in Indonesia are immature. The group expects 6,300ha of estates to reach maturity this financial year, bringing the total mature area in Indonesia to 10,061ha. Assuming an average FFB yield of 10 tonnes/ha from these areas, the group expects to harvest around 100,000 tonnes of FFB from Indonesia in FY14, which represents an 80% increase from FY13's 55,579 tonnes. FFB output from its Sabah estates is expected to pick up in the coming months and peak in Oct due to the seasonal factor. But overall FFB production from these estates is expected to be flattish due to the ongoing replanting programme. Based on this, we project the group's overall FFB production growth to be approximately 6% in FY14.

3.2 Facing challenges of lower ASPs and rising costs
IJMP is expected to post lower earnings in FY14 due to lower selling prices, rising estate costs in Malaysia and potential start-up losses for its mills and estates in Indonesia. We gathered that the group's cost of production for CPO (inclusive of HQ and replanting costs but after palm kernel credit in Sabah) could go up to RM1,600 per tonne from RM1,400 in FY13 due to higher labour costs following the implementation of the minimum wage on 1 Jan 2013 and lower palm kernel credit due to weaker palm kernel selling prices.

On top of this, ASP achieved in 1QFY14 of RM2,234 per tonne is lower than 1QFY13’s average of RM3,192. At current CPO prices, the Indonesian operations may not turn in a profit during the first year of maturity due to the low start-up crop yield and the need to absorb the full fixed plantation maintenance and overhead costs for its Indonesian estates when they mature. In 1QFY14, the group's pretax profit fell by 90% to RM2.9m due to lower selling prices, higher estate costs and net translation loss of RM6.5m for its US$ debt (due to the strengthening of the US$ against the Rupiah). IJMP has been taking on US$ debt to fund its Indonesian expansion. As at 30 June 2013, its outstanding US$ borrowings totalled US$165m (RM524m) but net gearing was a manageable 0.13x.


3.3 Expansion plans in 2014
The group will continue to plant the remaining landbank in Indonesia. As at 31 March 2013, only 57% of its 48,071ha landbank in Indonesia was planted. We gathered that the group plans to plant another 3,000ha in FY14 and is constructing a second palm oil mill with the capacity of 90 tonnes per hour in Indonesia. The new planting cost in Indonesia is around RM18,000 per ha. For FY14, the group estimates a capex of around RM270m. RM250m of the capex will be devoted to its immature and new planting areas as well as the new 90 tonnes/hr mill in Indonesia, which costs approximately RM100m.

4. VALUATION
4.1 P/Es not cheap; SOP may be better valuation tool
We like the group’s high-yield estates in Sabah and the huge potential of its Indonesian operations. However, the stock is not cheap on P/E basis as it is currently trading at 16.3x consensus forward P/E due to the subdued CPO price and rising estate costs. Also, IJMP’s earnings could be dampened further by translation losses for its US$ debt if the rupiah continues to weaken against the US$. We feel that valuing the group’s estates at recently transacted market prices may be a better way to capture the group’s long-term potential value given that most of its Indonesian estates are immature. In view of this, we use sum-of-parts (SOP) valuation.

4.2 A good long-term investment
We value the group’s Sabah planted estates at an EV/ha of RM80k, which we believe is conservative as we are merely applying market price and have not considered the higher yield potential of its estates relative to its peers. For the Indonesian planted estates, we price them at an EV/ha of US$10k, which is close to the price that planters are willing to fork out today for estates there and is in line with recent transactions. For unplanted land in Indonesia, we value it at an EV/ha of US$1k. We also place some value on its processing facilities and HQ building and deducted the group’s RM180m net debt to arrive at a value of RM3.70 per share. However, the group has 79.5m outstanding warrants (exercise price of RM2.62) which will expire on 7 Nov 2014,. Taking this into consideration, we arrive at a fully diluted fair value of RM3.61 per share, which represents upside of 22% from the current price.

The stock may not re-rate to this level in the near term due to its unexciting earnings prospects. We think that share price catalysts may emerge in 1H CY2015 when the liquidity of the stock is likely to improve due to full conversion of the warrants, which are in the money. At the same time, investors can look forward to up to 50% of its current planted estates in Indonesia reaching maturing, leading to a stronger earnings jump in FY3/16.



Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 24/09/13

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