United Malacca Bhd
(June 27, RM5.22)
Maintain underperform with an unchanged target price (TP) of RM4.90: Financial year 2019 (FY19) core net loss (CNL) at RM33.8 million was 116%/159% of our/consensus FY19E CNL of RM29.1 million/RM21.2 million. The negative deviation stemmed from lower-than-expected crude palm oil (CPO) price and palm kernel (PK) price of RM2,071 per tonne and RM1,481/tonne (versus our FY19E assumption of RM2,100/tonne and RM1,700/tonne). Meanwhile, fresh fruit bunch (FFB) output of 354,000 tonne came within our assumption at 103%. A six sen dividend declared was a positive surprise, bringing FY19 dividend per share (DPS) to eight sen versus our assumption of four sen as we expected a lower quantum amid losses.

 
FY19 registered CNL of RM33.8 million (versus FY18’s CNL of RM23.6 million), dragged by (i) weaker average CPO prices (-21%) to RM2,071/tonne, (ii) lower average PK prices (-36%) to RM1,481/tonne, (iii) softer FFB output (-7%) due to lower productivity of old palm trees in Sabah and (iv) stubbornly high maintenance costs from young trees in Indonesia. Q-o-q, despite higher average CPO prices (+6%), 4Q19 CNL widened (240%) to RM11.1 million (from the third quarter of 2019 [3QFY19] CNL of RM3.3 million) as FFB output fell (-11%) on seasonality. This was exacerbated by decline in PK prices (-10%).

The group’s new palm oil mill in Indonesia with FFB processing capacity of 45tonne/hour, has commenced in June 2019. This is expected to expand its total milling capacity by around 56% to 125 tonne/hour. By conservatively assuming an oil extraction rate of 17% and utilisation rate of 25% in FY20, we estimate that the new mill could contribute an additional RM16 million to revenue in FY20. Nevertheless, we expect slight losses from the plant due to initial under-utilisation.

We widen our FY20E CNL by 4% to RM18.4 million (low base effect) as we tweaked our FFB output (+3%) to 376,000 tonne, implying y-o-y growth of 6% (previously 7%) due to housekeeping, while introducing FY21E CNL of RM6.8 million. We also adjusted our FY20E DPS higher to six sen (previously four sen).

We maintain “underperform” with an unchanged TP of RM4.90 based on an unchanged forward price-to-book value (PBV) of 0.62 times applied to CY20E book value per share of RM7.89. The forward PBV is based on steep -2 standard deviaton (SD) from the historical mean (universe range: -2.0 SD to 1.0 SD), given that the company has disappointed expectations seven quarters in a row, and near-term earnings are likely to be impeded by high maintenance costs for young trees in Indonesia.

Risks to our call are a stronger-than-expected recovery in CPO prices and higher-than-expected FFB production. — Kenanga Research, June 27