IJM faces higher production cost pressure despite higher CPO prices

The oil palm planter has secured lower forward sales agreements compared to a year ago and higher fertiliser bill

By NUR HANANI AZMAN / Pic source ijm.com

IJM Plantations Bhd’s (IJMP) financial prospects will be supported by higher crude palm oil (CPO) prices as the company faces higher cost pressure and flat production growth for the period ahead.

Although the oil palm planter has secured lower forward sales agreements compared to a year ago, the high CPO market prices now will support its top-line number as the company faces a higher fertiliser bill.

Hong Leong Investment Bank Bhd (HLIB) analyst Chye Wen Fei noted that IJMP has locked in forward sales of 10%-15% of its production in Malaysia for its financial year 2022 (FY22) compared to 30% last year, as the forward sales market has been relatively quiet amid current high CPO prices.

“Nevertheless, the full effect of high CPO prices will not be felt in its earnings, as effective CPO selling price in Indonesia is capped by the export levy structure in Indonesia,” Chye added.

IJMP achieved CPO production costs of RM1,800 per metric tonne (MT) for Malaysia operations and RM2,000/MT for Indonesia operations.

Chye said production cost will likely trend up marginally in FY22 due to slightly higher fertiliser cost and minimum wage in Indonesia amid flattish fresh fruit bunches (FFB) production growth.

“We understand IJMP has locked in its fertiliser requirement for FY22, with prices 7%-10% higher year-on-year (YoY),” Chye added.

The plantation company’s management shared that it will not be regaining its Shariah-approved investment status anytime soon, given its current loan composition on its balance sheet (where bulk of the loans came from Indonesia).

HLIB has maintained a ‘Buy’ call on IJMP with an unchanged target price (TP) of RM2.29.

RHB Investment Bank Bhd (RHB Research) is also positive towards IJMP’s prospects as minimal forward sales should enable the group to capture the bulk of the price increase in Malaysia. Its analyst Hoe Lee Leng said the impact of unfavourable export levies in Indonesia has already been discounted in its valuation.

For FY21, FFB production at the group was flat YoY. Its Malaysian operations recorded 1% growth after accounting for replanting while certain areas of Indonesia (Lampung and Kaltim) continued to suffer from the drought in 2019, resulting in a slight growth YoY.

“Management now guides production growth for FY22F to remain flat due to its replanting programme, continued dry weather impact and shortage of harvesters. We revise our FY22-FY23 FFB projections down to 2%-4% (from 5%-7%),” she said in a note yesterday.

IJMP is trying to minimise capital expenditure (capex) for FY22F and has budgeted RM70 million, which will be utilised for its replanting activities (targeting 2,000ha-2,500ha) and maintenance for its mills. In its nine months of FY21, capex spent was RM44.2 million.

RHB Research, therefore, lowered its capex estimates accordingly.

“Post-briefing, we lowered our earnings slightly by 1%-2% per annum after bringing down FFB growth assumptions and lowering capex estimates,” said the research house.

It maintained a ‘Buy’ call on IJMP with a new TP of RM2.20 from RM2.25, 27% upside and 2% yield, based on an unchanged 2021F price-to-earnings ratio of 16 times.

Hoe said the shortage of workers in Sabah currently stands at 5%-10%, primarily composed of tall-palm harvesters.

“Currently, it remains manageable due to the off-peak season and restrictions of movement in the state, but if the current situation is to persist, the shortage could increase to 10%-15% by September.

“For FY22F, fertiliser prices are expected to trend higher (7%-10%) due to higher petroleum prices and freight rates. We have already projected unit costs to rise by 8%-10% for FY22F,” she said.

Hoe said IJMP’s non-Shariah status is likely to remain while its debt repayment plan is on track, with RM50 million of total principal repayment expected every quarter for 2021.

“Despite conversations with the Securities Commission Malaysia (SC), IJMP will likely be excluded from the May review given it is based on the latest audited accounts, where the company failed to meet SC’s financial ratio benchmark,” she said.