UMCCA’s 1QFY25 results came in within expectations. Core net profit rose as its strong Malaysian harvest recovery, firm CPO prices and easier cost offset unusually poor Indonesian yields.

FY25 earnings outlook still appears positive as we expect CPO prices to hold with cost remaining easy and the group’s Indonesian yields to eventually recover. We maintain our FY25-26F core net profit, TP of RM6.00 and OUTPERFORM call.

1QFY25 core net profit, excluding forex loss (RM7.1m) and fair value gains (RM0.9m), amounted to 27% of Kenanga’s and 28% of consensus full-year estimate, thus coming in within our as well as market’s forecasts.

YoY, turnover rose 21% on better FFB production (+10%), firm CPO price (+8%) and lower costs which lifted PBT margins from 3% in the first quarter of the previous financial year to 11% in 1QFY25. However, QoQ top line slipped (-4%) on Indonesian harvest staying poorer than usual at 19,430 MT (-2% QoQ, -28% YoY). Fortunately, overall group CPO price held well (-2%) while PK price inched up (+5%), helping to cushion a drop in PBT margins which still fell from 14% to 11% QoQ. No 1Q dividend was declared, which is expected, even as net cash holding rose QoQ, from RM19m to RM48m.

Indonesia feeling the effects of earlier floods. Although UMCCA Indonesia unit reported losses again in 1QFY25 on very poor yields - other neighbouring estates also faced similar issue due possibly to floods a year or two ago. Nevertheless, August 2024 harvest has picked up and more importantly; (a) current planted area is in Kalimantan is set to expand from 8,129 Ha to about 11,400 Ha, and (b) FFB yields are expected to eventually recover and improve as the trees mature into higher yielding age-bracket. Coupled with more mature Malaysian operations, group earnings should enjoy robust growth over FY25-26 of 14% on average.

Margins to stay healthy. UMCCA is expected to register firm FY25- 26F CPO prices of around RM3,800 per MT as global edible oil supply and demand balance stays tight. After last year’s production surplus, global edible oil supply is expected to grow slower than demand in CY24 as well as CY25 leading to inventory levels moderating, supportive of firm CPO prices. Production costs should remain contained over FY24-25 as softer fertiliser and fuel costs as well as rising PK prices are expected to mitigate rising wages ahead.

Forecasts. No change.

Valuations. We keep our TP of RM6.00 unchanged based on 0.9x P/NTA. Our valuation basis for UMCCA is in line with the historical P/NTA range of 0.9x to 1.1x for smaller planters, which is also at a 10% discount to its NTA to reflect its historically weak ROE. There is no change to our TP based on its 3-star ESG rating as appraised by us (see Page 3). Maintain OUTPERFORM as we see value in the current level.

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

Source: Kenanga Research - 20 Sep 2024