Investment Highlights

• We maintain UNDERWEIGHT on Sime Darby Plantation (SDP) with an unchanged higher fair value of RM4.90/share. SDP’s PE valuation is expensive. Our fair value for SDP is based on an FY20F PE of 40x.

• SDP has declared a final gross DPS of 1.0 sen for 4QFY19, which brings total gross DPS to 1.0 sen for FY19. We have forecast a gross DPS of 5 sen for FY20F.

• SDP’s FY19 core net profit of about RM80mil (ex-net impairments of RM280mil) was below our expectations and consensus estimates. SDP reported a core net loss of RM69mil in 4QFY19 vs. a core net profit of RM57mil in 3QFY19 due to fair value losses of RM177mil on commodity futures (RM175mil) and forex contracts (RM2mil).

• We believe that SDP’s upstream division registered fair value losses of about RM136mil in FY19 while the downstream division in Europe, the Middle East and Africa chalked up fair value losses of roughly RM39mil.

• Only the upstream division in Indonesia and the downstream unit were profitable in 4QFY19.

• The upstream division in Malaysia reported a loss before interest, tax and associates of RM67mil in 4QFY19 against an EBIT of RM88mil in 3QFY19. Average CPO price realised was RM2,229/tonne in 4QFY19 vs. RM2,028/tonne in 3QFY19.

• The upstream division in Papua New Guinea registered a smaller loss before interest, tax and associates of RM42mil in 4QFY19 compared with RM102mil in 3QFY19.

• Comparing FY19 against FY18, SDP’s core net profit plummeted to RM80mil in FY19 from RM793mil in FY18 dragged by fair value losses, weaker palm product prices and a fall in FFB production.

• SDP’s group average CPO price realised slid by 5.5% to RM2,063/tonne in FY19 from RM2,184/tonne in FY18. SDP’s FFB production edged down by 6% in FY19 mainly due to an 8% fall each in Indonesia and PNG. Also, SDP’s FFB production eased by 5% in Malaysia but grew by 16% in Liberia in FY19.

• Downstream EBIT edged down by 1.1% to RM276mil in FY19. EBIT margin was flat at 2.9% in FY19. The downstream division’s EBIT could have been higher in FY19 if the group did not incur fair value losses on commodity futures contracts.

Source: AmInvest Research - 2 Mar 2020