3QFY20 core net profit above expectations due to lower than expected losses from JV
Young tree age profile moving into prime age will sustain long term earnings growth
Solid balance sheet with RM3.49 net cash/share or 60% of current share price
Maintain BUY with higher DCF-derived TP of RM8.15
Supported by better CPO prices. Chin Teck Plantations (CTP) reported a stronger core net profit of RM11.2m for 3QFY20 after stripping off fair value gain on investment securities and foreign exchange (forex) gain. The significant q-o-q improvement in core net profit was due to stronger fresh fruit bunches (FFB) production, while better y-o-y core net profit was thanks to higher average crude palm oil (CPO) prices. 9MFY20 net profit was RM22.9m (-9.2% y-o-y). Revenue was within expectations, but core net profit came in stronger than expected due to higher than expected other income and lower than expected losses from joint venture (JV) and associates.
Stronger FFB growth q-o-q. 3QFY20 FFB production came in at 62.1k MT (+81.2% q-o-q, -5.6% y-o-y), while 9MFY20 FFB production decreased by 18% y-o-y. CPO production dropped 17.1% y-o-y (+62.4% q-o-q) in 3QFY20 as oil extraction rate (OER) was lower at 18.6% compared to 19.0% in 3QFY19.
The lower y-o-y FFB production was mainly due to the impact of dry weather which lagged from 2019. The drop in production was also in line with industry trend. CTP’s estates are located in Pahang, Negeri Sembilan and Kelantan. According to Malaysian Palm Oil Board (MPOB) data, Negeri Sembilan’s CPO production declined 19.9% y-o-y, followed by Pahang (-10.9% y-o-y) and Kelantan (-10.3% y-o-y).
Stronger CPO prices y-o-y. CTP’s better y-o-y results were mainly driven by stronger CPO prices. Average CPO prices strengthened 15.1% y-o-y to RM2,252/tonne in 3QFY20.
Dividend of 8 sen; total yield of 2.7%. CTP declared a second interim dividend of 8 sen to be paid on 28 August 2020. Total dividend declared for FY20 was 16 sen, translating into a dividend yield of 2.7%. We are forecasting dividend per share (DPS) of 17 sen or dividend payout ratio of 50% for FY20.
Associates continued to report losses. CTP’s associates continued to register losses in 3QFY20 due to wider losses incurred by investments in its oil palm plantation in Indonesia.
Still undervalued with excess cash. CTP’s war chest is still impressive with cash and bank balances of RM318.4m. CTP has a net cash per share of RM3.49 in 3QFY20 (vs RM3.30 in 2QFY20), approximately 60% of its current share price of RM5.69. The net cash per share of RM3.49 signifies a high floor for its share price. CTP’s net cash position will also enable it to withstand any weakness in CPO production and fall in CPO prices.
Valuation and recommendation
Maintain BUY with higher DCF-derived TP of RM8.15. We raise FY20F profit estimates by 29% to factor in higher other income and lower losses from joint venture and associates. Post earnings adjustment, our discounted cash flow (DCF)-based target price (TP) increases from RM8.05 to RM8.15. Despite the near term disruption to FFB production due to dry weather in 2019, we remain long-term positive on CTP due to its; i) young tree age profile with more trees moving into prime age that fetch higher FFB yield, ii) strong net cash position.
About 29% of CTP’s trees were 6-10 years in FY19 and will gradually move into prime age of 11-20 years with higher FFB yield of above 20 tonne/ha in the upcoming years. Apart from that, the resumption of exports to India due to restocking activity has reduced palm oil inventory which is positive for CPO prices in the near term and will likely support CTP’s share price.
Source: Alliance Research - 29 Jul 2020