Investment Highlights

• We maintain UNDERWEIGHT on Sime Darby Plantation (SDP) with a higher fair value of RM4.90/share. Our fair value of RM4.90/share (vs. RM4.30/share previously) for SDP is based on a PE of 40x on FY20F EPS. We have raised SDP’s FY20F net profit marginally to account for a higher average CPO price assumption of RM2,300/tonne vs. RM2,200/tonne originally.

• Excluding impairments of RM300mil and a RM9mil gain on disposal of a subsidiary, SDP’s 9MFY19 core net profit was below consensus estimates and our expectations. We have reduced SDP’s FY19E net profit by 10.3% to account for a weaker-than-expected plantation EBIT margin.

• SDP said that the recent recovery in CPO prices has no significant impact on its FY19E net profit as the group had already committed forward sales.

• SDP reported a net loss of RM243mil in 3QFY19 due to impairments of RM300mil. Out of the impairments of RM300mil, RM256mil was in respect of the assets in Liberia, RM19mil was on assets in Indonesia and RM25mil was in respect of a loan to a joint venture.

• SDP is currently in negotiations to sell its Liberia operations. We believe that SDP’s investment in Liberia has been fully written off.

• Excluding the impairments, SDP’s EBIT rebounded to a positive RM139mil in 3QFY19 from a loss of RM6mil in 2QFY19. This was driven mainly by a 104.7% surge in the EBIT of the Malaysia division and an earnings turnaround in Indonesia.

• On a negative note, losses in the PNG (Papua New Guinea) division widened to RM102mil in 3QFY19 from RM76mil in 2QFY19 due to losses in the sugar unit, a 16% decline in FFB production and 6.1% drop in CPO price.

• The Indonesia unit recorded an EBIT of RM90.0mil in 3QFY19 vs. a loss of RM11.0mil in 2QFY19. FFB production in Indonesia climbed by 24% QoQ to 742,000 tonnes in 3QFY19.

• SDP’s group FFB production edged down by 1% YoY in 9MFY19. The Indonesian division recorded an 8% YoY decline in FFB output in 9MFY19. FFB production in PNG shrank by 4% YoY in 9MFY19 while in Malaysia, FFB output expanded by 3%.

• Downstream EBIT improved by 33.3% QoQ to RM68.0mil in 3QFY19. The strong downstream earnings in 3QFY19 was driven by a surge in demand from India for bulk products and higher margins from the differentiated product segment.

Source: AmInvest Research - 2 Dec 2019