Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with an unchanged fair value (FV) of RM4.90/share. Although we have raised SDP’s FY21F net profit by 17.8% and FY22F net earnings by 12.1%, we are keeping our FV due to a lower PE assumption of 27x (vs. 30x previously). We believe that ESG concerns would continue to affect the group’s share price performance. We ascribe a three-star ESG rating for SDP.

• SDP’s 1QFY21 core net profit exceeded our forecast by 20% and consensus by roughly 7%. We have raised SDP’s FY21F net profit by 17.8% to account for higher-than-expected operating profit margins in the plantation division and downstream unit.

• SDP reported a larger core net profit (ex-gain on disposal of land of RM124mil) of RM429.0mil in 1QFY21 vs. RM58.0mil in 1QFY20. SDP’s Papua New Guinea (PNG) division benefited from robust palm product prices in 1QFY21 while the downstream division enjoyed higher contribution from the trading and bulk products segments.

• Within the upstream segment, the PNG and Indonesia units performed well in 1QFY21. This helped compensate for a 31.4% YoY fall in the EBIT of the Malaysia upstream unit. In Malaysia, the average CPO price realised was RM3,026/tonne in 1QFY21. This was lower than the MPOB spot price of RM3,895/tonne as SDP had sold forward a significant portion of its FY21F CPO production at weaker prices. FFB production in Malaysia edged down by 2% YoY in 1QFY21.

• EBIT of PNG’s upstream unit surged to RM233.0mil in 1QFY21 from RM74.0mil in 1QFY20 on the back of strong CPO prices. Average CPO price realised in PNG was RM3,890/tonne, which was close to spot prices. On a negative note, FFB output in PNG dipped 1% YoY in 1QFY21.

• In Indonesia, the upstream unit recorded a higher EBIT of RM190.0mil in 1QFY21 vs. RM39.0mil in 1QFY20. Average CPO price realised was RM2,886/tonne in 1QFY21, indicating a discount of RM1,009/tonne to Malaysia’s spot prices. After a weak FY20, SDP’s FFB production in Indonesia rebounded by 20% YoY in 1QFY21.

• SDP’s downstream EBIT expanded by 20.2% YoY to RM107.0mil in 1QFY21. We attribute this to higher refining margins in Indonesia and improved trading profits. EBIT margin was 3.4% in 1QFY21 vs. 3.8% in 1QFY20.

Source: AmInvest Research - 21 May 2021