Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with an unchanged fair value of RM5.50/share, which is based on an FY21F PE of 40x.

• SDP has declared an interim dividend of 2.57 sen/share and special interim dividend of 1.45 sen/share for 1HFY20. For the full year, we have forecast a gross DPS of 6 sen, which implies a yield of 1.2%.

• SDP’s 1HFY20 posted a net profit of RM846.0mil (1HFY19: RM101.0mil), including exceptional items totalling RM533mil. These consisted of gains of RM403mil on the disposal of landbank in Malaysia, RM56mil on the sale of subsidiaries and RM74mil on the reversal of foreign currency reserves due to the disposal of the Liberia assets in late 2019.

• Excluding these items, SDP’s core net profit of RM313.0mil in 1HFY20 was 26.0% below our expectations and 9.0% short of consensus. We have cut SDP’s FY20E net profit by 25.0% to account for lower downstream EBIT and FFB output growth.

• SDP’s EBIT fell by 8.2% QoQ in 2QFY20. However, due to a lower effective tax rate 20.4% in 2QFY20 vs. 29.7% in 1QFY20, SDP’s core net profit rose by more than twofold in 2QFY20.

• SDP’s downstream division was adversely affected by Covid- 19 in 2QFY20. Downstream EBIT plunged by 73.0% to RM24.0mil in 2QFY20 from RM89.0mil in 1QFY20.The division suffered a drop in demand for packed products due to the closure of the HORECA sector in Europe. Demand from India and China was also poor in 2QFY20.

• As for the plantation division, FFB production fell by 7.0% YoY in 1HFY20. Malaysia’s FFB output shrank by 9.0% YoY in 1HFY20 while in Indonesia, FFB production slid by 4.0%. The PNG division registered a 2% YoY decline in FFB output in 1HFY20. Average CPO price (group level) realised climbed by 22.8% to RM2,475/tonne in 1HFY20 from RM2,016/tonne in 1HFY19.

• Underpinned by higher palm product prices, SDP’s upstream division in Malaysia recorded a larger EBIT of RM375.0mil in 1HFY20 compared with RM156mil in 1HFY19. Malaysia accounted for 62.1% of SDP’s upstream EBIT in 1HFY20.

• Indonesia’s upstream EBIT swung to RM132.0mil in 1HFY20 from a loss of RM2.0mil in 1HFY19 while in PNG, EBIT was RM97.0mil in 1HFY20 against a loss of RM95.0mil in 1HFY19.

Source: AmInvest Research - 28 Aug 2020