Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with a lower fair value (FV) of RM5.50/share (vs. RM5.55/share). Our FV is based on an FY21F PE of 35x (vs. 40x originally). We ascribe a lower PE of 35x to SDP due to ESG concerns. Although more than 90% of SDP’s palm oil are RSPOcertified, we believe that concerns over the USA’s ban on SDP’s palm products would drag on the group’s valuations.

• We have raised SDP’s FY21F net profit by 13.2% to account for a higher average CPO price assumption of RM3,000/tonne compared with RM2,500/tonne previously.

• SDP has declared a final gross DPS of 5.4 sen in 4QFY20, which brings total gross DPS to 9.4 sen for FY20 (FY19: 1.0 sen).

• SDP’s core net profit of RM903.0mil (ex-net exceptional gains of RM282.0mil) in FY20 was 12.6% above our forecast but 6.6% below consensus estimates. Included in SDP’s 4QFY20 reported net profit was an impairment charge of RM236.0mil for its 50%-owned Emery Oleochemicals joint venture.

• SDP performed better than our expectations due to the downstream division. Downstream EBIT climbed by 39.9% to RM386.0mil in FY20 on the back of margin enhancements from higher selling prices and cost controls. EBIT margin of the downstream unit rose to 3.5% in FY20 from 2.9% in FY19.

• Comparing 4QFY20 against 3QFY20, SDP’s downstream division recorded a higher EBIT of RM202.0mil vs. RM71.0mil. EBIT margin surged to 12.0% in 4QFY20 from 5.4% in 3QFY20 underpinned by trading gains and higher selling prices.

• SDP’s upstream division benefited from higher palm product prices in FY20. Average CPO price realised (group level) rose by 22.7% to RM2,532/tonne in FY20 from RM2,063/tonne in FY19.

• However, we believe that SDP’s realised CPO prices would have been higher if not for forward sales. SDP carried out some forward sales of CPO in Malaysia as reflected in the CPO price realised of RM2,523/tonne in 4QFY20 vs. the MPOB spot price of RM3,341/tonne. Group average CPO price was RM2,664/tonne in 4QFY20.

• Still, the higher CPO price compensated for the 4.0% fall in group FFB production in FY20. SDP’s FFB production in Malaysia shrank by 3.0% in FY20. The group’s FFB output in Indonesia declined by 5.0% in FY20 while in PNG, FFB production was flat. Malaysia accounted for 55.9% of SDP’s upstream EBIT in FY20. This was followed by Indonesia (37.0%) and Papua New Guinea (PNG) (7.2%).

Source: AmInvest Research - 19 Feb 2021