UMCCA’s 9MFY24 results beat expectations on strong profits from its maturing Indonesian operation. Its soaring Indonesia operation helped group-wide FFB harvest to stay flattish while operating cost also eased. We raise our FY24-25F net profit forecasts by 13% each, lift our TP by 20% to RM6.00 (from RM5.00), and upgrade UMCCA to OUTPERFORM from MARKET PERFORM.

Its 9MFY24 core net profit (excluding forex loss of RM6.7m and RM1.5m in fair value gains) beat expectations at 89% and 90% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast was due largely to continual improvement of its Indonesia operation where its 9MFY24 FFB output rose 69% YoY thanks to an 11% expansion in matured area coupled with a 52% jump in FFB yield as its Kalimantan estates grew into more productive age profile.

Its 3QFY24 core net profit rose 19% QoQ as EBIT margin improved 16% to 20% thanks to continual improvement in its Indonesian harvest. The most productive quarter for UMCCA is usually 2Q (Aug-Oct) but flattish 3QFY24 FFB output of 0.177m MT (-0.1% QoQ, -2% YoY) was due to 10% QoQ uptick from Indonesia which offset the slightly weaker QoQ Malaysian harvest. Consequently, unit cost eased, helping to lift margins. After just breaking even in 2Q, its Indonesia operation reported PBT of RM3.3m for 3QFY24. Net debt also dipped QoQ from RM31m to RM17m or 2% net gearing. After declaring a 5.0 sen interim DPS for the first half, no dividend was declared for 3Q which is expected.

Some helpful tailwind emerging. We are expecting FY24-25F CPO price to stay firm at RM3,800 per MT as global edible oil supply and demand balance is tightening after a surplus in CY23. CY24-25F supply is expected to inch up YoY but not enough to maintain inventory as demand is expected to grow at 3%-4% YoY. Amidst a scenario of easing inventories, supportive CPO prices are likely over CY24-25. Production cost should moderate as well thanks in part to better harvest but also lower fertiliser and fuel spot prices by 20-40% YoY, helping to offset rising wages cost pressures.

Forecasts. We raise our FY24-25F net profit forecasts by 13% each largely to reflect the improving efficiencies in its Indonesia operation which should stay so moving forward. Nonetheless, we maintain our FY24-25F annual NDPS forecast of 12.0 sen.

Valuations. Correspondingly, we lift our TP by 20% from RM5.00 to RM6.00 on 0.9x P/NTA based on: (i) smaller plantation groups’ average of 0.9x to 1.1x over a over a medium (3-year) to long-term (15-year) commodity cycle basis, and a (ii) 10% discount against 1x P/NTA for UMCCA in view of the group’s weak ROE in the past. There is no change to our TP based on its 3-star ESG rating as appraised by us (see Page 3). Maintain MARKET PERFORM.

Risks to our call include: (i) adverse weather, (ii) softer CPO prices, and (iii) rising cost of labour, fertiliser and fuel.

Source: Kenanga Research - 27 Mar 2024