Investment Highlights

• Maintain UNDERWEIGHT on Sime Darby Plantation (SDP) with a lower fair value of RM4.55/share. Our fair value for SDP is based on an unchanged FY19F PE of 35x.

• We have reduced SDP’s FY19F net profit by 5.9% to account for a weaker plantation EBIT margin and lower revenue growth for the downstream division. Our plantation EBIT margin for SDP is now 48% for FY19F compared with 50% previously. We believe that SDP’s FY19F plantation EBIT margin would be eroded by higher costs of wages and fertiliser.

• In Indonesia, average minimum wage is envisaged to increase by 8% in 2019F. In Malaysia, average minimum wage was raised to RM1,100/month compared with RM1,000/month previously.

• We believe that news flow may come in the form of the disposal of the Liberian assets. This is because operating conditions in Liberia are increasingly challenging and difficult.

• We estimate the net book value of SDP’s Liberian assets to be US$66mil or RM274mil. The Liberian unit recorded a smaller loss of RM46mil in 9MFY18 compared with RM125mil in 9MFY17. SDP has recorded impairments of RM314mil in respect of the Liberian assets since FY17.

• Operationally, we have assumed that SDP’s FFB production would improve by 5% in FY19F vs. an estimated decline of 0.3% in FY18E. The increase in SDP’s FY19F FFB production is expected to be underpinned mainly by enhancements in FFB yields in Indonesia and Papua New Guinea (PNG).

• Compared with other plantation companies, SDP’s Indonesia unit did not perform well in FY18E as it was hit by floods in Sumatra in 1Q. We believe that SDP’s FFB production in Sumatra fell by more than 10% in FY18E. This offset the increases in FFB production recorded by the Kalimantan unit in FY18E.

• We foresee challenging operating conditions for SDP’s downstream unit in FY19F. We believe that selling prices of specialty and bulk products would continue to come under pressure in FY19F due to stiff competitionand rising cost of feedstock. We have assumed the EBIT margin of the downstream division to be 2.0% in FY19F (9MFY18: 3.1%).

Source: AmInvest Research - 28 Jan 2019