United Malacca expected to have better quarters ahead

KUALA LUMPUR: United Malacca Bhd (United Malacca) is expected to have better quarters ahead as the group heads into the high production seasons, analsyts say.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), management continues to expect higher fresh fruit bunch (FFB) production on United Malacca’s substantial maturing area.

While Kenanga Research trimmed its estimates slightly to reflect lower group yields, the research arm continued to expect above-average financial year 2018 and 2019 estimate (FY18 and FY19E) FFB growth of 16 and 16 per cent (from 23 and 14 per cent), well exceeding the sector average of eight per cent.

“We expect better quarters ahead as we enter the high production seasons between September to November for both Sabah and Kalimantan,” it said.

The research arm has meanwhile noted that long-term prospects could be supported by United Malacca’s joint venture (JV) in Sulawesi, Indonesia to diversify its crop base with a concession right to develop 59,900 hectares (ha) of forest area with a non-palm oil cash crop.

Kenanga Research thus reduced FY18-19E core net profit (CNP) by five per cent to RM73.6 million to RM75.5 million as the research arm updated its yield assumptions as mentioned previously.

However, Kenanga Research maintained ‘outperform’ on the stock.

The research arm rolled forward its valuation base year to current year 2018 estimate (CY18E), from average CY17-18E, and incorporated its earnings adjustment for lower earnings per share (EPS) of 35.9 sen (from 37.3 sen).

The research arm’s Fwd. price earnings ratio (PER) was also unchanged at 20.4-fold based on 0.5 standard deviation (SD) valuation basis.

“This is in line with planters with above-average FFB growth outlook,” it said.

In spite of the soft first quarter of 2018 (1Q18) performance, Kenanga Research noted that this quarter tended to be the weakest quarter for United Malacca with a five-year historical average of 22 per cent of full-year profits, while 2Q to 3Q contributed up to 55 per cent of full-year profits.

“FY17 which also had high maturing acreage of 2,500ha, saw similar earnings performance with 1Q17 making up merely 11 per cent of full-year contribution.

“As such, we expect to see better core profit contributions in the coming quarters,” it said.

While share prices might take a hit in the near-term, the research arm maintained its positive longterm outlook in view of United Malacca’s high FFB growth prospect and potential diversification plans.