Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with an unchanged fair value of RM5.55/share. Our fair value for SDP is based on a FY21F PE of 40x. SDP’s FY21F PE is demanding at 35.9x.
   
• Our FY21F earnings forecast for SDP is unchanged. However, we have raised SDP’s FY20E net profit by 5.9% to account for higher plantation EBIT margin and downstream earnings.
   
• We think that SDP’s downstream division would perform well in 4QFY20 on the back of higher trading profits. We believe that the increase in trading profits would compensate for the erosion in EBIT margins of the differentiated and bulk products segments in the downstream division (bulk products, differentiated products and trading activities) in 4QFY20. The trading segment accounted for 28% of the downstream division’s EBIT in 9MFY20.
   
• We believe that SDP’s de-gearing exercise would take a breather in FY21F. Due to the Covid-19 pandemic, we reckon that there is little appetite for landbank acquisition currently. Also, approvals from government agencies on any potential sale of landbank may take some time.
   
• As at end-June 2020, SDP had sold about 58.1% or 1,350 acres out of the 2,324 acres of landbank targeted for disposal. We think that SDP recognised gains of RM450mil from the disposal of landbank and non-performing assets in 9MFY20.
   
• Operationally, we have assumed a group FFB production growth of 4.0% for SDP in FY21F. We believe that most of the increase in FFB output in FY21F would come from Indonesia. We expect SDP’s FFB production in Indonesia to recover by 5% in FY21F after falling by about 10% in FY20E.
   
• About less than 5% of SDP’s oil palm estates in Malaysia were affected by the recent floods. There was minimal impact in Indonesia as the group’s estates in Kalimantan had already experienced heavy rains in 3QFY20. The impact in PNG (Papua New Guinea) is not known yet as the wet season usually takes place only from February onwards.

Source: AmInvest Research - 19 Jan 2021