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 an FY21F PE of 40x.

• We estimate SDP’s gross DPS to be 8.5 sen in FY21F compared with 8.0 sen in FY20E. This implies a net payout of 61.2% in FY21F vs. 69.8% in FY20.

• We believe that SDP would perform better in FY21F on the back of improvements in plantation and downstream earnings. We forecast SDP’s plantation EBIT to improve by 18.2% in FY21F while downstream EBIT is expected to rise by 14.1%.

• We expect SDP’s FFB production to inch up 4.0% in FY21F after falling by 5.0% in FY20E. We anticipate a recovery in FFB yields in Malaysia, Indonesia and Papua New Guinea (PNG) in FY21F after being affected by 3Q2019’s drought and haze in FY20E.

• We have assumed that group FFB yield would be 20.0 tonnes/ha in FY21F vs. 19.0 tonnes/ha in FY20E. Malaysia is expected to account for 55% of SDP’s FFB production in FY21F, followed by Indonesia (30%) and Papua New Guinea (15%).

• We believe that SDP’s cost of CPO production would be flat in FY21F as higher palm kernel credits compensate for increases in the cost of wages. We reckon that wages and incentives would rise in FY21F as SDP strives to keep its estate workforce intact.

• We believe that SDP would take time to complete its asset disposal programme. The disposal of all of the assets may only be completed in FY22F. SDP was supposed to sell more than 2,000 acres of land worth RM1.0bil in FY20E. As at 30 June 2020, the group had completed the sale of only 1,350 acres of land.

• We think that SDP would be using the proceeds from any disposal of the landbank to reduce gross borrowings of RM9.1bil (including perpetual sukuk of RM2.2bil). Recall that in April 2020, Moody’s Investors Service downgraded SDP’s issuer ratings to BAA2 from BAA1 due to its slow reduction in borrowings and earnings growth.

Source: AmInvest Research - 26 Jan 2021