Investment Highlights

• We downgrade Sime Darby Plantation (SDP) to HOLD from BUY with a lower fair value of RM4.40/share vs. RM4.88/share previously. Our fair value for SDP is based on an FY23F PE of 22.0x. We use SDP’s FY23F net profit to arrive at its fair value instead of FY22F as the prosperity tax in Malaysia would only be effective for a year. We expect SDP’s corporate tax rate to decline to 26% in FY23F from 29% in FY22F. We ascribe a three-star ESG rating to SDP.

• We raise SDP’s FY21E core net profit by 5.2% to account for a better-than-expected upstream EBIT margin. For FY22F however, we reduce SDP’s net profit by 7.4% to reflect a higher effective tax rate resulting from the tax on overseas dividend income and the prosperity tax in Malaysia.

• SDP’s 9MFY21 core net profit of RM1.5bil (excluding gains on disposal of land and gains on a retirement benefit plan in Indonesia amounting to RM262.0mil in total) was 6.0% above our forecast but within consensus estimates.

• SDP’s core net profit could have been higher in 3QFY21 if the downstream division did not suffer an erosion in EBIT margin.

• SDP’s downstream EBIT plunged to a mere RM7.0mil in 3QFY21 from RM146.0mil in 2QFY21 due to losses in the European refineries. The Asia Pacific bulk and European operations recorded fair value losses on commodity hedges as CPO prices rose. SDP registered RM70.0mil fair value losses on commodity contracts in 3QFY21. Its downstream EBIT margin slid to 0.3% in 3QFY21 from 7.8% in 2QFY21.

• On a positive note, SDP’s upstream division performed well on higher CPO prices. SDP’s upstream division recorded an EBIT of RM2.2bil in 9MFY21 vs. RM877.0mil in 9MFY20.

• SDP’s average CPO price realised climbed by 42.7% to RM3,545/tonne in 9MFY21 from RM2,485/tonne in 9MFY20. Average CPO price realised was RM3,441/tonne in Malaysia in 9MFY21 while in Indonesia, average CPO price realised was RM3,161/tonne. SDP’s average CPO price realised in PNG was RM4,262/tonne in 9MFY21 compared with RM2,567/tonne in 9MFY20.

• SDP recorded zero FFB production growth YoY in 9MFY21. Although FFB output increased by 16% YoY in Indonesia in 9MFY21, SDP’s FFB production in Malaysia fell by 7%. FFB output inched up by 1.0% YoY in PNG in 9MFY21.

Source: AmInvest Research - 19 Nov 2021