Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with an unchanged fair value of RM5.50/share. Our fair value for SDP is based on a FY21F PE of 40x.
• Sime Darby Plantation participated in Bursa Malaysia/AmInvestment Bank’s webinar yesterday and here are the highlights:
• We understand that SDP is currently facing a shortage of 10% or 2,500 workers at its oil palm estates in Malaysia. To alleviate the shortage, SDP has extended the contracts of most of its existing estate workers. About 60% of the group’s estate workers are from Indonesia.
• Also, SDP has recruited 300 Malaysians. None of them are from the prisons although SDP has visited prisons and drug rehabilitation centres in its recruitment drive. The locals will take over the jobs of the general workers at the oil palm estates while the general workers will be retrained as harvesters. General workers are usually in charge of upkeep and manuring at the oil palm estates.
• In addition, SDP is trying to mechanise some of the processes in the estates such as manuring and collection of loose fruits. Harvesting intervals have been extended from once in 10 to 12 days to once in 15 days. This can be done as FFB yields were weak in 1HFY20.
• SDP does not expect its net profit to be affected by the shortage of workers as CPO prices are higher this year. We have assumed that SDP’s FFB production would inch down by 1.5% in FY20E. We understand that labour shortage is more acute in Sarawak compared with Sabah or Peninsular Malaysia.
• SDP’s FFB yields in Indonesia are weak. SDP’s average FFB yield in Indonesia was 17.14 tonnes/ha in FY19 compared with 20.9 tonnes/ha in Malaysia and 22.4 tonnes/ha in Papua New Guinea (PNG). The low FFB yield in Indonesia is due to ageing oil palm trees and a low number of trees per ha. The previous owner of Minamas Plantations planted 110 to 120 trees per ha in the late 1990s compared with the industry average of 148 trees.
• To rectify this, SDP started aggressively replanting the ageing oil palm trees in Indonesia three years ago. The group replanted about 6% to 7% of the planted areas in Indonesia per year. SDP also increased the number of tree plantings to 168 trees per ha.
• SDP hopes to increase the FFB yield in Indonesia to 20 tonnes/ha by FY23F. The group is also hopeful that the average FFB yields in Malaysia and PNG would exceed the target of 23 tonnes/ha each in FY23F. SDP’s goals are to achieve an average group FFB yield of 23 tonnes/ha and oil extraction rate of 23% in FY23F.

Source: AmInvest Research - 10 Sept 2020