United Malacca Bhd
(Dec 19, RM5.38)
Maintain sell with an unchanged target price of RM5.32: United Malacca Bhd’s core losses narrowed to RM13.7 million for the second quarter ended Oct 31, 2019 (2QFY20) compared with RM18.5 million for the preceding quarter, thanks to higher fresh fruit bunch (FFB) production and palm oil prices.

 
After stripping a gain on the disposal of non-current assets held for sale of RM103.2 million and other exceptional items, United Malacca’s first half ended Oct 31, 2019 (1HFY20) core loss widened to RM32.2 million compared with RM18.6 million a year ago. We deemed the results as within expectations as we are expecting a stronger 2H, driven by higher palm oil prices.

Despite a higher FFB production, its 1H core loss was mainly due to the lower prices of crude palm oil (CPO) and palm kernel, and a higher cost of production stemming from young matured palms in Kalimantan, Indonesia. Its 1H FFB production increased 19% year-on-year (y-o-y) to 178,200 tonnes, mainly due to a higher yield of FFB production in Malaysia and Indonesia. In Malaysia, the average CPO selling price contracted 9.5% y-o-y to RM2,010 per tonne. The palm kernel selling price also declined substantially to RM1,137 per tonne or 33% y-o-y.

Its loss before tax from Malaysia widened 13.6% y-o-y to RM14.6 million. Losses from Indonesia narrowed 4.3% y-o-y to RM8.1 million. The management expects a higher FFB production for the financial year ending April 30, 2020 (FY20) due to a favourable FFB yield as a result of palms’ recovery from adverse weather in the past two years and an improved productivity.

We expect the group to perform better in 2H due to higher palm oil prices. Key risks to our call include the CPO price outperforming our expectations, crude oil price rallies and a stronger-than-expected FFB production growth. — TA Securities, Dec 19