Investment Highlights

• We maintain UNDERWEIGHT on Sime Darby Plantation (SDP) with an unchanged fair value of RM3.43/share. SDP is currently trading at a lofty FY21F PE of 35.9x. Our fair value of RM3.43/share for SDP is based on an FY21F PE of 25x.

• Included in SDP’s reported net profit were a gain of RM262mil on the disposal of 366ha of land in Malaysia and a RM74mil gain on a reversal of foreign currency reserves resulting from the disposal of the Liberia assets in late 2019. SDP also recorded fair value gains of RM198mil on commodity futures contracts in 1QFY20 after registering fair value losses of RM175mil in 4QFY19 and zero in 1QFY19.

• After stripping out the disposal gain and reversal of foreign currency reserves amounting to RM336mil in total (but including the RM198mil fair value gains on commodity futures contracts), SDP’s 1QFY20 core net profit of RM58.0mil fell short of our forecast and consensus estimates. We have reduced SDP’s FY20F net profit by 17% to account for weaker plantation and downstream EBIT margins.

• SDP was dragged by a RM74mil write-down of deferred tax assets arising from the change in corporate tax rates in Indonesia in March 2020. As a result, SDP’s effective tax rate surged to 29.7% in 1QFY20 from 11.2% in 1QFY19.

• Also interestingly, SDP’s average CPO price realised in Malaysia was only RM2,491/tonne in 1QFY20 compared with RM2,600/tonne to RM2,620/tonne achieved by several plantation companies (with operations in Malaysia and Indonesia) and MPOB average spot price of RM2,703/tonne.

• Still, SDP benefited from the YoY surge in CPO prices in 1QFY20. EBIT of the upstream division in Malaysia climbed to RM175.0mil in 1QFY20 from RM113.0mil in 1QFY19 (partly driven by fair value gains) while in Indonesia, the upstream division registered a larger EBIT of RM39.0mil in 1QFY20 vs. a mere RM9.0mil a year ago. The PNG division recorded an EBIT of RM74.0mil in 1QFY20 compared to a loss of RM19.0mil in 1QFY19.

• Group average CPO price realised rose by 29.5% to RM2,605/tonne in 1QFY20 from RM2,012/tonne in 1QFY19. Average CPO prices realised were RM2,491/tonne in Malaysia, RM2,613/tonne in Indonesia and RM2,828/tonne in PNG in 1QFY20.

• Group FFB production growth was -16% YoY in 1QFY20. In Malaysia, FFB output fell by 23.0% YoY in 1QFY20 while FFB production in Indonesia slid by 3%. The PNG division registered a 9% YoY decline in FFB output in 1QFY20.

Source: AmInvest Research - 27 May 2020