Rating revision on plantation companies

PETALING JAYA: Hong Leong Investment Bank (HLIB) Research has downgraded its ratings on plantation companies.

This is on the basis that valuations have stretched following the recent share price run-up and earnings revision.

The research house has downgraded IOI Corp Bhd’s rating to a sell from a hold previously, with a lower target price of RM3.82.

This is following the downward revision in core net profit forecasts for its financial year ending June 30, 2020 (FY20)-FY22 and 32%-owned Bumitama Agri’s latest share price.

It has lowered IOI’S FY20 core net profit forecast by -10.6% due to a lower fresh fruit bunch (FFB) yield assumption in FY20, and lower earnings assumption for the manufacturing segment.

Quarter-on quarter, IOI’S core net profit for the third quarter ended March 31 declined 35.2% to Rm142.7mil.

This came on higher palm product prices being negated by a 20.8% decline in the FFB output.

This was due to a low production cycle and the three-week closure order imposed on certain districts in Sabah, where 40% of IOI’S plantations are located, as well as the weaker performance of the oleochemical and refining sub-segments coupled with a share of loss from a 30%-owned associate.

On the other hand, HLIB Research has also downgraded Kuala Lumpur Kepong Bhd’s (KLK) rating to a hold from a buy earlier, with an unchanged target price of RM22.82.

The research outfit expects a weaker performance in the second half of its financial year ending Sept 30 (H2) due to lower palm product prices.

“KLK’S H1 core net profit of Rm419mil accounted for 50.8% and 56.2% of consensus and our full-year estimates.

“We consider the results within expectations, as we expect a weaker performance in H2 on the back of lower palm product prices,” it added.

Besides that, the research house has also downgraded Hap Seng Plantations Holdings Bhd’s rating to a sell from a buy earlier, with a lower target price of RM1.36 after its earnings revision.

“Post-earnings revision, we have lowered our sum-of-parts target price for Hap Seng by 6.2% to RM1.36 based on 20 times the financial year ending Dec 31, 2021 (FY21) earnings per share of 5.9 sen, and net cash balance of 17.7 sen as at March 31, 2020.

“We have lowered Hap Seng’s FY20 and FY21 net profit forecast by 58.5% and 9% to Rm15.4mil and Rm47.3mil, mainly to account for lower FFB yield assumptions,” it noted.

In the first quarter ended March 31, Hap Seng posted a net loss of Rm6mil compared to its expectations and the consensus FY20 profit estimates of Rm67.1mil and Rm61.1mil, respectively.

The shortfall in results was largely due to lower-than-expected FFB output.