Below expectations. Kencana's 1H12 core earnings came in below expectations, making up 27.0% of our full year forecast of USD19.1m. We believe the shortfall was due to: (i) higher expectations of the full year's production, and (ii) a possible shipment delay, judging from the 21.7% increase in inventory from a quarter ago.

Production commendable. The company's 1H12 nucleus production grew by a commendable 11.3% to 178.9k tonnes. Its 2Q12 production increased by a more impressive 16.1%. However, compared to our forecast of 438.9k tonnes for FY12, the company's production appears to fall short. Our forecast implies a 1H:2H production ratio of 41:59, not impossible to achieve as Kencana has hit a 39:61 ratio in a previous corresponding period before.

On stronger footing this year. 51% of Kencana's mature area of 23,663ha falls into the prime mature age, an improvement compared to just 39.3% at the end of FY11. The higher percentage of trees in the prime mature age means the company will enjoy both strong production growth and better profitability.

Maintain forecast and BUY call. There is no change to our earnings forecast for FY12 at USD19.1m, which we believe is achievable. Our FY13 forecast of USD27.4m represents a 43.7% jump in earnings, which is conservative considering the average CPO price assumption of RM3,500 per tonne and Kencana's production growth. We are likely to revise up our FY13 forecast depending on the company's financial performance for the next quarter. The stock is trading at undemanding 11.4x FY13 earnings and USD10.3k per planted hectare.

Source: OSK