Wednesday, July 6, 2011

UMCCA ... Jul11

TA Securities Research:-

Key Investment Risk
Key risk to our earnings forecasts/recommendation are, 1) sharp correction in CPO price, 2) FFB harvest
disappoints, and 3) sharp correction in crude oil price.

Recent Developments
A Decent Year 4Q10 net profit grew on both QoQ (+21.5%) and YoY (+59.7%) basis to RM22.8mn, thanks to higher CPO and palm kernel price, partially offset by lower CPO production. For the whole year, net profit increased by 28.7% YoY to RM81.4mn on the back of a 15.2% increase in revenue to RM205.7mn. Bulk of the increase in earnings was attributable to higher CPO price and full year
contribution from the Millian – Labau estates. Average CPO selling price in FY11 was RM2,971/tonne (4Q:
RM3,597/tonne), a 24.3% increase compared with RM2,390/tonne in the preceding year.

Below Expectations Due to Weak CPO Production The results were some 8% below our expectations.
This was attributable to, 1) higher than expected depreciation, 2) lower than expected CPO production.
FY11 FFB harvest declined by a marginal 0.1% YoY but CPO production (excluding CPO processed from
external FFB source) declined by 12.1% YoY. CPO production contracted sharply particularly in the
Jan/Feb period. Recall that La‐Nina peaked during that period, impacting production via, 1) lower harvest as
harvesting and evacuation processes was hindered by wet weather, and 2) poor fruit quality resulting in
lower OER, which declined to between 18% ‐ 19%, in our estimate, during the period compared with the
typical 20% ‐ 21%.

Delivered On Dividends
United Malacca declared a final single‐tier (net) dividend of 17.5 sen/share. Combined with interim
dividend of 7.5 sen, total dividend for the year amounted to 25 sen/share (FY10: 23.33 sen). That
figure came in slightly above our expectations of 24 sen/share. At the current price, the final dividend
translates into 2.5% net yield.

Earnings Outlook
Revision In Earnings Forecasts FY12 and FY13 earnings forecasts revised lower by 1.7% and 2.5% respectively to take into account the higher depreciation rate and mature acreage estimates. Despite
the downward revision, our revise FY12 earnings forecasts still implies a 46% YoY growth in EPS. The
growth will be driven by in FFB harvest and OER, thanks to normalising weather condition as well as higher yield from the newly matured acres.

We value the stock based on PER methodology. The target PER pegged at the 5‐year historical rolling average of 13x. Based on revised FY12 EPS of 58.8 sen, we have adjusted our target price on the stock slightly lower to RM7.64 (RM7.76 previously).

Recommendation Maintain As Hold
No change in our recommendation. United Malacca remains as a Hold with potential capital upside of 10%.
Key re‐rating catalyst is the company engaging in value accretive acquisitions.

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