Consensus overestimation on United Malacca’s financial performance

KUCHING: United Malacca Bhd's (United Malacca) first quarter financial year 2017 (1QFY17) financial results has come in below consensus full year results.

When unrealised foreign exchange (forex) losses of RM5.4 million were stripped out, United Malacca's core net profit (CNP) plunged to RM8.8 million showing a decrease of 39.8 per cent quarter over quarter (QoQ) and 28.5 per cent year over year (YoY).

The research house TA Securities Holdings Bhd ( TA Research) reported that this only accounted for 15 per cent and 13 per cent of theirs and consensus full year estimates, respectively.

“The lower than expected profit was mainly due to lower fresh fruit bunch ( FFB) production and higher operating expenses,” explained the research house.

The decrease of FFB production by 15.4 per cent and subsequent decrease of 1QFY17 revenue by 6.4 per cent YoY is believed to be mainly due to the lingering effects of El Nino in Malaysia.

As such, the research house has readjusted their FY17 and FY18 earnings forecast lower by 8.4 per cent and 15 per cent respectively for United Malacca.

This comes following a reduction in the research house's forecast for FFB production growth and consideration in higher operating costs.

While, United Malacca's management had anticipated the dry spell caused by El Nino to affect FFB production in the first half of financial year 2017 (1HFY17), they still expect a better FFB production growth for FY17 overall.

Justifi cation for expectation is due to the maturation of their additional 833 hectare of plantation land and the first full year contribution of its majority owned company, Lifere Agro Kapuas.

The research house has decided to maintain their ‘hold' call on United Malacca with an adjusted lower target price of RM6.13 per share after the earnings adjustment.

“Although we still like the group for its well managed operations and attractive dividend policy, upside to share price in the short term will be capped b the earnings impact arising from high production costs,” concluded the research arm.

It should also be noted that key risks that would affect TA Research's forecasts are a longer gestation period for United Malacca's Indonesian plantation, global economic slowdown, and lower than expected FFB production.