Indonesia FFB yields a key concern
- 1QFY23 core net profit was below expectations owing to weaker FFB yields.
- We expect a weaker 2QFY23F, driven by weaker CPO prices.
- We lower our TP to RM5.37, now based on a 20% discount to its SOP, and reiterate our Hold call as UMB appears fairly valued at these levels.
1QFY23 results a miss on weaker FFB yields
United Malacca (UMB) posted a 53% yoy jump in 1QFY4/23 core net profit to RM28m (excluding forex and fv losses on biological assets). This was mainly driven by higher average selling prices (ASPs) for its palm products. We consider the core net profit to be below expectations as it makes up 20%/24% of our/consensus’ core net profit forecasts, due mainly to lower-than-expected FFB yields, particularly for its Kalimantan estates.
Higher ASPs for its Malaysian operations offset weaker output
UMB’s Malaysian operations posted a 42% yoy increase in 1QFY23 EBITDA to RM49.2m, mainly due to higher ASPs achieved. Average CPO price achieved for 1QFY23 at its Malaysian operations jumped 48% yoy to RM5,606 per tonne. This was broadly in line with the MPOB reference price (RM5,680 per tonne) for the same period, suggesting that UMB largely traded on spot basis for its Malaysian operations. On a qoq basis, EBITDA for its Malaysia operations fell by 4% as the seasonally stronger FFB production (+16%) was offset by weaker CPO prices (-7% qoq) and potentially higher operating costs from higher fertiliser and labour costs.
Indonesia earnings hampered by deterioration in FFB yields
UMB’s Indonesia (Kalimantan) estate operations posted a 52% yoy decline in its 1QFY23 EBITDA as the sharp deterioration of 41% in its Kalimantan estate FFB yields to 1.74mt/ha in 1QFY23 eclipsed the impact of higher CPO prices (+37% yoy). We believe the fall in its FFB yields was likely driven by heavy rainfall during the quarter. This caused UMB’s Kalimantan estates to once again book losses at the PBT level of RM3.3m vs. a profit of RM0.9m in 1QFY22. We are concerned given the sharp decline in its Kalimantan estates yields as we had originally anticipated that this division would drive the group’s FFB output growth going forward, from higher mature areas and a better age profile.
Reiterate Hold, expect a weaker 2QFY23F on lower CPO prices
Hence, we lower our FY23F core EPS forecasts by 37% to reflect weaker FFB yields for its Kalimantan estates as well as lower CPO prices. We expect UMB to deliver a sequentially weaker 2QFY23F as any additional net profits from seasonally higher FFB output is likely to be offset by lower CPO prices as MPOB CPO prices averaged RM4,169/3,762 per tonne in Aug/MTD Sep 2022, vs. UMB’s 1QFY22 achieved CPO price of RM5,606 per tonne for its Malaysia operations. We lower our TP to RM5.37, now based on a 20% discount to its SOP (see Fig 5). Key re-rating catalysts are the unlocking of value of the group’s estates through estate sales. Upside/downside risks include higher/lower CPO prices and output.