United Plantations Berhad - United Plantations Berhad
Fri, 26-Apr-2024 07:55 am
by Steven Chong • Apex Research

Counter

UTDPLT (2089)

Target Price (RM)

25.83

Recommendation

Hold

  • No change in yield targets. UP maintained its FFB yield targets at 28 mt/ha for its Malaysian plantations and 25.5 mt/ha for Indonesia. In addition, the Group plans to replant between 1,600 to 1,700 ha for FY24. In FY23, the refinery segment of UP attained an extraordinary profit margin, reaching a record high, despite facing challenges from elevated CPO prices, which usually erode profitability in the downstream business. We attribute the success primarily to UP's hedging strategy, which allows the Group to secure higher ASP. Nevertheless, we anticipate a decline in the refinery margin moving forward, as UP may continue to face hedging losses, should CPO prices remain elevated throughout the year.

  • UP competitive advantage still intact. In addressing the competitive challenge presented by a peer’s new high-yielding oil palm seed (GenomeSelect), management perceives it as being in its early stages. The assessment stems from the recognition that achieving high yields in a meticulously chosen small area differs significantly from replicating those outcomes across the entire planted region. UP remains steadfast in its leadership position, excelling not only in palm oil yield but also in quality. This advantage enables the Group to command superior selling prices against peers.

  • On sustainability matters. In a bid to reduce herbicide usage in oil palm plantations, the Group introduced a distinctive approach aimed at controlling rat infestations by promoting biodiversity. This strategy involves employing barn owls, leopard cats, and cobra snakes as the first line of defense against these pest threat. Considering that rats make up a substantial portion of these predators' food sources, UP simultaneously increased their populations alongside the expansion of planted areas, all without incurring additional expenses for pesticides. Currently, UP's pesticide usage per tonne of oil produced is 5-8x lower compared to rapeseed and soybean farmers.

  • Valuation. Following the appreciation in share price (+48.2% YTD), we downgrade our recommendation to HOLD (previously BUY) with a target price of RM25.83 based on forward PE multiple of 16.0x and FY24F EPS of RM1.79.

  • Risk. EU export ban and regulations, changing weather patterns affect FFB production, taxation and export ban in Indonesia threatens local CPO demand, shortage of labours and rising operational cost.
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