Investment Highlights

• We are downgrading our recommendation on Sime Darby Plantation (SDP) from HOLD to SELL with a lower fair value of RM4.90/share. Our fair value implies an FY19F PE of 35x.

• In spite of the plunge in CPO price, SDP has outperformed the KLCI by 3.9 percentage points on a three-month basis and 0.3 percentage point on a six-month basis.

• We have introduced a new net profit for SDPL to account for the change in its financial year-end from June 2019 to December 2018. We forecast SDP’s core net profit at RM853.3mil in FYE12/18E and RM946.8mil for FYE12/19F. We have assumed an average CPO price of RM2,300/tonne for FYE12/19F.

• SDP’s core net profit was poor in 3QFY18. We estimate that core net profit tumbled by 63.3% QoQ to RM115mil in 3QFY18. The PNG division recorded a sharp 61% QoQ decline in EBIT in 3QFY18 dragged by a 12% fall in CPO price and 7% decrease in FFB production.

• Comparing 9MFY18 against 9MFY17, plantation EBIT fell by 23.8% YoY to about RM1.1bil in 9MFY18 dragged by the Malaysia and PNG divisions.

• EBIT of the Malaysia unit dived by 19.0% YoY in 9MFY18 while in PNG, EBIT dropped by 60.6%. PNG faced heavy floods in 1QFY18, which resulted in higher repairs and infrastructure costs.

• EBIT of the Indonesia division rose by about 8.5% YoY to RM166mil in 9MFY18 on the back of a strong FFB production. On a quarterly basis however, EBIT of the Indonesia unit shrank by 31.5% to RM63mil in 3QFY18.

• We believe that the division was affected by the drop in CPO price and higher transportation costs. Recall that a few provinces in Indonesia such as Kalimantan faced a shortage of barges in 3QFY18.

• After performing well in 1HFY18, EBIT of SDP’s downstream unit softened in 3QFY18. EBIT of the downstream division eased by 29.4% from RM68mil in 2QFY18 to RM48mil in 3QFY18 due to stiff competition for specialty products, which resulted in a drop in sales volume. EBIT margin was 2.0% in 3QFY18 vs. 2.7% in 2QFY18.

Source: AmInvest Research - 26 Nov 2018