Investment Highlights

• We are keeping our UNDERWEIGHT stance on Sime Darby Plantation (SDP) with an unchanged fair value of RM4.55/share. Our fair value for SDP is based on an FY19F PE of 35x.

• SDP’s FY18 net profit was below our forecast and consensus estimates. Consensus was expecting 4QFY18 net profit to be RM265mil vs. the group’s core net profit of RM115mil. Plantation EBIT margin was weaker-thanexpected due to the plunge in CPO prices.

• SDP recorded a RM15mil impairment for its plantation assets in Liberia in 4QFY18. Previously, SDP recorded impairments of RM314mil for its investments in Liberia.

• We believe that SDP’s core net profit (ex-exceptional loss of RM241mil) fell to RM764mil in FY18 from RM1.1bil in FY17. SDP’s FFB production inched down by 0.4% in FY18.

• The plantation divisions in Malaysia, Indonesia and Papua New Guinea (PNG) recorded declines in EBIT of 38% to 58% YoY in FY18.

• Among the three upstream divisions, the PNG unit performed the worst. EBIT of the PNG division tumbled by 57.7% to RM172mil in FY18 from RM407mil in FY17 due to the plunge in CPO price and higher infrastructure costs resulting from the floods in 1QFY18. Also, we believe that FFB production in PNG inched up by only a low singledigit percentage in FY18.

• EBIT of the Malaysia upstream division slid by 38.0% to RM796mil in FY18 from RM1.28bil in FY17. EBIT margin of the unit was 20.9% in FY18 compared with 38.2% in FY17. We estimate that SDP’s FFB production in Malaysia shrank by more than 10% in FY18.

• On a positive note, the downstream division recorded a higher EBIT of RM279mil in FY18 compared with RM82.0mil in FY17. EBIT margin of the downstream unit improved to 2.9% in FY18 from 0.9% in FY17 in the absence of inventory write-downs.

• Comparing 4QFY18 against 3QFY18, the downstream division’s EBIT surged by 104.2% from RM48mil to RM98mil. EBIT margin rose to 2.6% in 4QFY18 from 2.0% in 3QFY18 underpinned by improved sales volume and lower costs of bulk and differentiated products. SDP’s refining units in Indonesia enjoyed positive margins as cost of feedstock fell in 4QFY18.

Source: AmInvest Research - 1 Mar 2019