Can JTIASA Makes It Back?

JTIASA announced an improved latest Q1FY18 quarterly result end of last month, at $255.7m revenue and $42.3m PBT which has improvement of 4% revenue and 44% PBT over the same quarter last year.

The slight increasing in revenue due higher CPO and PK sales volume of 26% and 31% respectively. Profit margin has significantly increased due to better OER, CPO selling price and mills capacity utilization rate, as well as lower OPEX.

Nonetheless, with the improvement of Q1FY18, the share price is gradually diving few cents for the past 1 month. Why is that?

Well, that’s the question. We only can explain that more sellers than the buyers, and that’s why share price is diving. But we only can confirm that the management and major shareholders are not selling any at this moment. It doesn’t matter for now, our discussion point today is to review if JTIASA share price can return to where it falls about 1 year ago, RM1.60-1.70.

With the market capitalization of $1b, what can JTIASA offers?

The most attractive part will be one helps us making recurring income - plantation land bank, which is about 69,649 hectare (ha).  We’ll also get 4 units of CPO mills with capacity of 60 / 90/ 120 MT per hour. We will also own the largest timber concession area and quota in the country, with total of 662,563 hectares and annum quota of 630,000 m3. On top of that, we will also own the wood downstream processing of plywood and veneer business with factories. We will put aside reforestation business for now, as it is not making any money but more to CSR.

We will need about $11.5k to purchase 1 acre of JTIASA’s planted land bank upon some basic calculation. The market price is around $30k to $40k per acre depends on location and landscape. Hence, JTIASA share price is consider way underprice if we calculate based on per acre price.

The business offers and land bank price sounds attractive, but why JTIASA’s share price has plummeted over the past 1 year especially during this bull year?

The business offers and land bank price sounds attractive, but why JTIASA’s share price has plummeted over the past 1 year especially during this bull year?

If we are to look at JTIASA’s past 5 years performance, it has stopped growing since FY15, it’s up and down from FY15-FY17, with FY17 is the worst ever PBT among the recent 5 years, due to the goodwill impairment of $62.3m in wood manufacturing segment as well as reduction in log and plywood volume. Else, FY17 PBT supposes be the best among the 5 years. Well, it is really out of expectation and let a lot of its investors dropped their jaws once the Q4FY17 QR released.

Now, that’s the catch. I noticed below are some potential signs about JTIASA right now:

1.     JTIASA has more than 75% age profile of mature area in FY18 to be cropped, which can contribute significant to the group for the next few years. There’s also 19% are young mature. Hence, we are expecting good potential with the increase in CPO and PK volumes.

2.     With the increasing of mature area and FFB production, OER expected to be increased from 16% to 18% in FY18, which significantly improve the gross profit margin.

3.     CPO price has been stabled over the past 1 year and now stood at $2,400-2,600 which can bring stable profits to the group. The further hike of CPO price will be additional bonus for JTIASA.

4.     With the completion of Harimaya CPO mill few months ago, there will be further CAPEX savings on transportation and distribution costs.

5.     Since the impairment of goodwill is one time deduction, we assumed and hope that it won’t come back again in FY18.

6.     The significant duty hike and limited supply for logs will be continuing impacting the timber profits. But JTIASA has officially transferred the listing to plantation last month. Hence, the core income should be from plantation and whatever generates from timber and reforestation are bonus. We expect the timber price remains competitive due to limited supply as well as economy is improving in the timber imported countries such as India. Hence, there should be profits for JTIASA under timber export division.

On the other hand, we noticed there’s some negative signs from JTIASA as well, as below:

1.       The appreciation of MYR against USD will impact the profit margin from the export currency gain for both palm oil and timber.

2.       Minimum wages imposed by Govt and serious shortage of labors continue to be the main issues and margin killer for palm oil industry.

3.       The management has invested almost $71m to help their ‘related’ company – RSAWIT early this year, to exchange about 10% of RSAWIT share at 50 cents each. Yes, by calculating the per acre price, RSAWIT share is super value. But it is in huge debts position with very limited cash in bank. A bulk of its profit will be just used to pay debts for now and yet only 60% of the land bank is being planted. Can it sustains when CPO price drops? Hence, we are not sure when it can comes back. With RSAWIT share price has fall to 38 cents recently, JTIASA is making about 30% paper loss in this investment. I would personally think it is a bad investment at this moment, unless RSAWIT has the ability to turnaround by getting more fund injection to plant more trees, cut down unnecessary CAPEX, and cash out the loss making businesses.

In summary, for sure, the potentials are definitely overriding the drawbacks, especially with the current share price.

Let’s obtain a closer peer with similar age profile of mature area to compare in terms of valuation, KMLOONG. Its share price has been performed over the past 2 years, from $2 to $4.50. It has only less than 15,000 hectares plantation land bank but with 76% age profile of mature area, about the same as JTIASA for FY18. That’s why the one can see KMLOONG is just sitting there to reap the profit over the past 2 years with increasing FFB and income. If we look at KMLOONG current valuation, its share price standing at PER 12.x.

For JTIASA, its land bank is about 4.7 times larger than KMLOONG. Hence, it deserves a higher valuation should the plantation business is back on track. Let’s assume that JTIASA conservative estimated net profit for FY18 is around $120m, the PER would be at 8.5. If the target PER is 14-15, then the share price should be $$1.75 - $1.88. 

I would think JTIASA might be able to come back at this price within 1-2 years’ time depend on the FFB growth, provided no impairment and other surprise again. Yes, its share price won’t shoot up like semi-conductor companies or act like a roller coaster, but at least its business and income are more predictable and stable.

Note: This post is not recommendation of buy or sell of a company shares, but only personal opinion.

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