Sime Darby Plantation kick started 1QFY23 with core earnings of RM69m, down  90% YoY, dampened by weaker earnings contributions from all operating units while Malaysian operations posted a surprise loss as well as a surge in finance costs. The weak results were below our and the street full-year expectations,  making up only 4%, respectively. We cut our FY23-25F earnings forecasts by  9%-35% as we revise down our FFB production growth and margin assumption  due to lower palm kernel credit and higher operating costs. Maintain Neutral with  a lower TP of RM4.02 after rolling over valuations to FY24. No dividend was  declared for the quarter.

• 1QFY23 revenue (QoQ: -28%, YoY: -7%). The group’s sales weakened 7%  YoY to RM4bn, as downstream sales fell 16% despite stronger revenue recorded by upstream Malaysia (>100%), upstream Indonesia (+39%) and upstream PNG/SI (+9%). 1QFY23 Average CPO prices slipped 13% YoY to  RM3,887/mt, contributed by Malaysia (RM4,148/mt), Indonesia (RM3,455/mt)  and PNG (RM4,034/mt). 1QFY23 FFB production fell 5% YoY to 1.8m mt,  mainly dragged by weaker production from Malaysia (YoY: -11%) as it continued to be affected by the lingering effects from the prolonged acute labour shortage. Lower OER were recorded in all operating countries as  Malaysia was impacted by extended harvesting intervals (slightly below 30  days) and delays in field upkeep had affected the quality of FFB delivered  while Indonesia and PNG were affected high rainfall, which disrupted the mill  operations.

• 1QFY23 core earnings tumbled 90%. Stripping out the non-core items, the  Group’s core earnings were down to RM69m, affected by weaker  contributions from upstream Indonesia (-31%) upstream PNG (-71%) and downstream (-49%) while upstream Malaysia posted a loss of RM21m. 1QFY23 CPO production cost (inclusive windfall levy, ex-PK credit) was  higher at RM2,700/mt (Malaysia: RM3,250/mt, Indonesia: RM2,400/mt and  PNG: RM2,400/mt), mainly due to higher fertilizer prices and exceptional costs associated with new hiring of 2,600 workers, which resulted in 20%  increase for Malaysian labour cost. The dismal performance for downstream was attributed to sales margin recorded by the Asian bulk and differentiated  operations despite better performance from the European operation. Due to  stiffer competition, refinery margin was negative.

• Outlook guidance. The Group has lowered its FFB production target to 10%,  due to lower single-digit growth in Malaysia while both Indonesia and PNG  are expected to see low-teen growth. Management expects to see normalization of productivity from new workers staring from Aug. On the CPO  production cost, management expects to see higher production cost of  RM2,600-2,700/mt for FY23 due to higher fertilizer cost, which rose about  13% in the 1H. Fertiliser application, Malaysia plantation is behind the schedule while both Indonesia and PNG are on track. Lastly, it expects to bring in 700 workers in May and another 1400 in June. It still requires another  1,700 harvesters in Malaysia.

Source: PublicInvest Research - 25 May 2023