Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with a higher fair value of RM5.55/share vs. RM5.50/share previously. Our fair value is based on an FY21F PE of 40x. We have raised SDP’s FY21F net profit by 1.5% to account for a higher average CPO price of RM2,500/tonne compared with RM2,400/tonne originally.
• SDP’s 9MFY20 core net profit of RM518.0mil (ex-RM518mil net exceptional gains) was 43.5% above our estimates and 14.6% above consensus. We have raised SDP’s FY20E net profit by 43.0% to account for a lower interest expense and a higher plantation EBIT margin. Included in SDP’s 9MFY20 core results were fair value gains on commodity contracts of RM155mil.
• SDP’s interest expense fell by 25.0% YoY to RM93.0mil in 9MFY20 as the group repaid RM3.1bil of its loans. Gross borrowings (including RM2.2bil sukuk) fell to RM9.1bil as at end-September 2020 from RM10.0bil as at end-December 2019.
• SDP’s RM518.0mil net exceptional gains comprised mainly gains of RM403.0mil on the disposal of landbank in Malaysia and RM74mil on the reversal of foreign currency reserves resulting from the disposal of the Liberia assets.
• Operationally, SDP’s EBIT (ex-Liberia) jumped by 193.2% YoY to RM1,073mil in 9MFY20 on the back of higher palm product prices. PNG’s upstream division swung into an EBIT of RM64.0mil in 9MFY20 from a loss of RM197.0mil in 9MFY19. Upstream earnings from Malaysia climbed by 148.4% YoY to RM606.0mil in 9MFY20 while EBIT of the Indonesia upstream division surged by 135.2% to RM207.0mil.
• Average CPO price realised (group level) increased by 23.9% to RM2,485/tonne in 9MFY20 from RM2,006/tonne in 9MFY19. However, group FFB production fell by 6% YoY in 9MFY20.
• Comparing 3QFY20 against 2QFY20 however, SDP’s EBIT edged down by 0.6% to RM346mil in 3QFY20 as the PNG upstream division swung into a loss of RM33.0mil from an EBIT of RM23mil. This was due to fair value losses on biological assets of RM24mil. In addition, FFB output in PNG slid by 16.0% QoQ in 3QFY20.
• Downstream EBIT slipped by 9.8% YoY to RM184.0mil in 9MFY20 as Covid-19 hit demand for bulk and differentiated products in Asia Pacific in 2QFY20. Downstream EBIT margin shrank to 2.4% in 9MFY20 from 3.6% in 9MFY19 as selling prices weakened on poor demand in 2QFY20. Comparing 3QFY20 against 2QFY20, downstream EBIT recovered to RM71.0mil from RM24.0mil on the back of improved demand in Asia Pacific. EBIT margin rose to 5.4% in 3QFY20 from 1.5% in 2QFY20.

Source: AmInvest Research - 24 Nov 2020