Investment Highlights

• We are keeping our UNDERWEIGHT stance on Sime Darby Plantation (SDP) with an unchanged fair value of RM4.30/share. Our fair value for SDP implies an FY20F PE of 35x.

• We have cut SDP’s FY19E net profit by 44.4% to account for weaker-than-expected earnings from the plantation division. SDP’s plantation EBIT plunged by 97.2% YoY to RM19.0mil in 1HFY19 dragged by weak CPO prices.

• The only profitable divisions in 2QFY19 were the Malaysia upstream unit, downstream operations and “others” segment. SDP’s upstream operations in Indonesia, PNG (Papua New Guinea) and Liberia recorded losses of RM107mil in total in 2QFY19.

• SDP’s upstream unit in Malaysia posted a 68.5% YoY drop in EBIT in 1HFY19 while the Indonesia division dived into the red with a loss of RM2mil in 1HFY19 from an EBIT of RM103mil in 1HFY18.

• PNG registered a loss of RM95.0mil in 1HFY19 compared with an EBIT of RM115mil in 1HFY18. Losses in the PNG division widened to RM76.0mil in 2QFY19 from RM19mil in 1QFY19 as FFB production fell and costs increased.

• Average CPO prices realised by the three upstream divisions fell by 6% to 20% YoY in 1HFY19. Average CPO price in Malaysia was RM2,014/tonne in 1HFY19 compared with an estimated RM2,448/tonne in 1HFY18.

• The Indonesia unit achieved an average CPO price of RM1,972/tonne in 1HFY19 vs. RM2,216/tonne in 1HFY18. In PNG, average CPO price realised was RM2,088/tonne in 1HFY19 against RM2,617/tonne in 1HFY18.

• Group FFB production rose by 4% YoY in 1HFY19. Liberia’s FFB output growth of 19% was the strongest among the three upstream divisions. In Malaysia, FFB production improved by 5% YoY in 1HFY19 while in Indonesia, FFB output growth was a small 1%. FFB output growth in PNG was 3% YoY in 1HFY19.

• On a positive note, downstream division was profitable in 1HFY19 due to improved margins in Malaysia and Indonesia. EBIT of the downstream unit inched up by 2.3% to RM136.0mil in 1HFY19 from RM133mil in 1HFY18. EBIT margin of the downstream division was 2.2% in 1HFY19 compared with 3.9% in 1HFY18.

• Comparing 2QFY19 against 1QFY19, EBIT margin of the downstream division inched down to 1.6% from 2.7%. Downstream EBIT declined by 40.0% QoQ to RM51.0mil in 2QFY19 due to weaker margins in Europe, Africa and the Middle East.

Source: AmInvest Research - 3 Sept 2019