Investment Highlights

• We are upgrading our recommendation on Sime Darby Plantation (SDP) to BUY from HOLD with a higher fair value of RM4.88/share (vs. RM3.80/share previously). Our fair value for SDP is based on an FY22F PE of 22.0x. We ascribe a three-star ESG rating to SDP.

• We have raised SDP’s FY21E net profit by 47.0% to account for a higher CPO price of RM3,500/tonne (vs. RM3,000/tonne previously) and better-than-expected downstream earnings. We also increased SDP’s FY22F net profit by 21.5% for similar reasons. We assumed an average CPO price of RM3,000/tonne for FY22F vs. RM2,800/tonne originally.

• SDP’s core net profit (ex-disposal gains of RM125mil on land, RM99mil gains from the retirement benefit plan in Indonesia pursuant to amendments in the omnibus law and asset impairments of RM41.0mil) of RM996.0mil in 1HFY21 was 55% above our forecast and 35% above consensus.

• SDP’s core net profit surged by 218.2% YoY to RM996.0mil in 1HFY21 underpinned by strong palm product prices. Although SDP’s average CPO price realised in Malaysia was below spot prices, the group still benefited from higher palm product prices, especially in Papua New Guinea (PNG). SDP’s average CPO price realised was RM3,422/tonne in 1HFY21, 38.3% higher than the average price of RM2,475/tonne in 1HFY20. Group FFB production growth was weak at 2.0% YoY in 1HFY21.

• SDP’s average CPO price realised in Malaysia was only RM3,347/tonne in 1HFY21. This was 17.4% below the MPOB’s average spot price of RM4,051/tonne as SDP had sold forward 70% of its Malaysia CPO production at lower prices.

• SDP’s average CPO price realised in Indonesia was RM2,993/tonne in 1HFY21. This was 26.1% weaker than the MPOB’s spot price of RM4,051/tonne due to the CPO export tax and levy. On a positive note, average CPO price realised in PNG was RM4,147/tonne in 1HFY21, which was above the MPOB’s spot price of RM4,051/tonne.

• As a result, EBIT of the PNG division climbed to RM431mil in 1HFY21 from RM97.0mil in 1HFY20. Indonesia division also performed well as reflected in the EBIT of RM511.0mil in 1HFY21 vs. RM132.0mil in 1HFY20. On the other hand, core EBIT of the Malaysia unit inched up by only 4.0% YoY to RM390mil in 1HFY21 dragged by a 5% fall in FFB production.

• SDP’s downstream EBIT expanded by 123.9% YoY to RM253.0mil in 1HFY21 on the back of fair value gains on commodity hedges of RM53mil in the EU and higher selling prices and sales volumes in the Asia Pacific region. The division’s EBIT margin rose to 3.7% in 1HFY21 from 2.3% in 1HFY20.

Source: AmInvest Research - 19 Aug 2021