HwangDBS Vickers Research projects IJM Plantations Bhd’s earnings to grow by 155% to RM112.0 million in FY08 and by 39% to RM155.2 million in FY09.

“Continued high crude palm oil (CPO) prices as well as improvement in fresh fruit bunches (FFB) yield are expected to fuel the growth. However, earnings are projected to ease by 7% to RM144.5 million in FY10 on the back of expected lower CPO prices,” it said.

The research house initiated coverage of the company with a buy call and a RM4.50 price target based on 10-year discounted cash flow (DCF) using WACC of 10.3% and terminal growth rate of 5%.

“Our valuation implies 19.4 times CY09 price/earnings. This compares to the average big-capitalised implied PE of 21.4 — based on our target prices,” it said.

HwangDBS Vickers Research described IJM Plantations as one of the fastest-growing palm oil players in Malaysia, having expanded into Indonesia since 2006, doubling its plantable landbank to 57,472ha.

While the company is forecast to book a strong 49% compounded annual growth rate (CAGR) in net profit over the next three years (on the back of strong CPO prices and higher FFB yield), it is also expected to offset long-term decline in CPO prices with volume growth from Indonesia.

“We view IJM Plantations’ aggressive new planting strategy in Indonesia positively, given the small landbank reserves left in Malaysia. We expect IJM Plantations to fill up its Indonesian landbank within six years, assuming 2,000-5,000ha of new planting per annum from FY09,” it said.

The research house also said IJM Plantations was also benefiting from the current strong CPO prices, as most of its planted estates are in prime age.

It said the Indonesian land injection also brought new growth prospects. Between November 2006 and June 2007, the company acquired three companies in East Kalimantan, Indonesia, with a combined area of 32,634ha, of which 26,500ha are plantable.

The acquisitions have expanded the company’s landbank by 36% to 42,056ha in FY07 and another 51% to 63,490ha in FY08. Out of the total landbank, 57,472ha are estimated to be plantable.

HwangDBS Vickers Research recently upgraded its forecast CPO prices to RM3,100 per tonne in 2008, RM2,800 in 2009 and RM2,650 in 2010.

The upgrading of the forecasts was prompted by the drop in US soybean acreage, potentially lower South American soybean yields due to La Nina, and the lingering effects of last year’s drought, which boosted wheat planted area at the expense of rapeseed expansion — all leading to reduced supply.

“The spillover effect from high crude oil prices, weaker USD, higher biofuel demand expectations, and substitution effects on the other hand, should keep demand for vegetable oils (soybean, palm and rapeseed oils) at high levels.

IJM Plantations is a direct beneficiary of strong CPO prices, as about 92% of its planted area is mature (FY3/08).

Slightly over half of this mature area — or about 12,000ha — is in its prime age. Going forward, it expects the FFB yield to also improve as more young trees mature.

IJM Plantations is building a biodiesel plant in Sandakan, Sabah, under a 60:40 joint venture with US-based CTI Biofuels LLC. The plant (targeted to be operational by the third quarter of 2008) is built on modular basis with the first three modules having a production capacity of 30,000 tonnes per annum.

The biodiesel project had been intended to augment the company’s revenue base. However, given high CPO prices, it believed that biodiesel production had become not viable.