Negative outlook for IJM Plant abates on easing issues
KUCHING: Researchers with Kenanga Investment Bank Bhd (Kenanga Research) was reassured that IJM Plantation Bhd’s (IJM Plant) negative outlook is abating thanks to the easing of its barge shortage issue on the back of crude palm oil (CPO) prices likely to recover post-December.
In a report, it saw that IJM PLantation’s fresh fruit bunch ( FFB) harvesting and CPO production activities in East Kalimantan, Indonesia, have recently been curbed by a shortage of barges.
This has, in turn, resulted in lower delivery of CPO to refineries, filling oil storage tanks to the brim.
In October, IJM Plant only produced 19,100 metric tonnes (MT) of CPO, compared to an average of 22,100MT during the same month of the past three years.
“Nevertheless, management said that the shortage issue is easing and should be resolved by 1QCY19, which we have factored this into our earnings estimates,” it highlighted in the report.
Meanwhile, the group does not wish to pursue certification from the Roundtable on Sustainable Palm Oil ( RSPO) as it incurs expensive membership fee, certification and audit costs.
In the Sabah region, IJM Plant has a total of 11 estates (five in Sandakan and six in Sugut) and four mills (two in Sandakan and two in Sugut).
“We understand that it costs circa RM50,000 to RM60,000 for certification for three supplying estates and one mill, and RM40,000 to RM50,000 for annual audit and surveillance,” it added.
“RSPO criteria are largely identical to those of the Malaysian Sustainable Palm Oil’s, except that RSPO also emphasises on high conservation value (HCV).”
To note, RSPO-certified CPO commands a premium of circa RM50 per metric tonne ( MT) compared to non-certified CPO, which means that IJM Plant’s CPO price realised is likely to be slightly lower than that of larger planters who target to obtain full RSPO certification.
Additionally, Kenanga Research observed that it was less flexible to hedge risks in East Malaysia due to the fact that for CPO futures trading, there are only three designated ports for delivery, which are all in Peninsular Malaysia – Port Klang, Penang, and Pasir Gudang.
“Therefore, it may be financially unviable for IJM Plant to use futures instrument for forward sale due to logistic issues,” it highlighted.
“While forward contracts are another option, the pricing is based on direct negotiation, and is hence less transparent and less flexible.
“IJM Plant’s CPO sales in Sabah are mostly based on MPOB’s average price of a month, but it normally receives payment 7 days prior to month- end to facilitate working capital, while any differential will be paid at month-end – same for other planters in East Malaysia.”
Kenanga Research also cited plenty of room for IJM Plant to adopt mechanisation.
As an example, it saw that only selected areas and a small portion of IJM Plant’s Desa Talisai estate are mechanised, as the estate is filled with mostly hilly terrains, making it difficult for mechanical equipment like grabbers and motorised wheelbarrows to navigate around.
“While the group does continue to envision further mechanisation in its estate operations over the long term, management also highlighted challenges vis- à- vis training existing workers or hiring experienced workers to use mechanical equipment.”