Investment Highlights

• We are keeping our UNDERWEIGHT stance on Sime Darby Plantation (SDP) with a lower fair value of RM4.30/share (vs. RM4.55/share previously). Our fair value for SDP is based on an FY20F PE of 35x.

• We have revised SDP’s FY20F net profit downwards by 7.1% to account for a weaker plantation EBIT margin of 50% against 55% originally and an average CPO price of RM2,200/tonne vs. RM2,350/tonne previously.

• We have reduced SDP’s FY19F net profit by 51.0% to account for a lower CPO price assumption and plantation EBIT margin. We have revised our FY19F average CPO price assumption for SDP to RM2,100/tonne from RM2,300/tonne.

• SDP’s 1QFY19 core net profit was 66% below our forecast and 71% short of consensus estimates due to weak palm product prices and EBIT margins. SDP reported a net profit of RM74mil in 1QFY19 compared with consensus estimates of RM1.04bil for the full year. SDP’s core net profit was RM221mil in 1QFY18.

• SDP was hit sharply by the fall in CPO prices in 1QFY19. SDP’s group average CPO price shrank by 17.9% to RM2,012/tonne in 1QFY19 from RM2,452/tonne in 1QFY18. The sharpest drop in CPO price was recorded by the PNG division. Average CPO price in PNG dived by 22.0% to RM2,063/tonne in 1QFY19 from RM2,644/tonne in 1QFY18.

• All of SDP’s divisions recorded YoY declines in EBIT in 1QFY19. EBIT of the Malaysia division contracted by 55.3% YoY to RM113.0mil in 1QFY19 while in Indonesia, EBIT slid by 18.2% to RM9.0mil.

• PNG unit recorded a loss of RM19mil in 1QFY19 compared with an EBIT of RM38mil in 1QFY18.

• On a positive note, SDP’s downstream EBIT rose by 30.8% YoY to RM85mil in 1QFY19. Compared against 4QFY18 however, downstream EBIT fell by 13.3% in 1QFY19. EBIT margin was 2.7% in 1QFY19 vs. 7.6% in 1QFY18 and 2.6% in 4QFY18.

• SDP’s downstream earnings in 1QFY19 were driven mainly by the Indonesia division. The unit recorded higher sales volume and margins in 1QFY19 due to the zero export duties in Indonesia. The decent earnings from Indonesia compensated for weaker earnings from Europe, Africa and the Middle East.

• Group FFB production grew by 8% YoY in 1QFY19. FFB output in Malaysia improved by 2% while in Indonesia, FFB production rose by 14%. FFB output in PNG expanded by 17% YoY in 1QFY19.

Source: AmInvest Research - 3 Jun 2019