Investment Highlights

• We maintain SELL on Sime Darby Plantation (SDP) with a higher fair value of RM4.40/share (vs. RM3.60/share previously). Our fair value for SDP is based on an unchanged FY23F PE of 18.0x. We have raised SDP’s FY22F net profit by 57.5% to account for a higher average CPO price of RM4,000/tonne vs. RM3,000/tonne previously. For FY23F, we have assumed an average CPO price of RM3,000/tonne vs. RM2,800/tonne previously. We ascribe a three-star ESG rating to SDP.

• SDP’s FY21 core net profit of RM2.2bil (excluding various exceptional items amounting to RM66.0mil in total) was within our forecast and consensus estimates.

• SDP’s core net profit was affected by a high effective tax rate of 49.1% (3QFY21: 23.1%) in 4QFY21. SDP recognised withholding tax of RM188.0mil on dividends remitted from overseas subsidiaries and deferred tax liabilities of RM78.0mil on unremitted earnings from subsidiaries, which are classified as assets for sale.

• SDP has declared a final gross DPS of 12.4 sen, which brings total gross DPS to 20.28 sen for FY21 (FY20: 11.5 sen). This translates into a dividend yield of 4.1%. We have forecast a similar gross DPS of 20.0 sen for FY22F.

• SDP’s upstream division recorded a larger EBIT of RM3.2bil in FY21 vs. RM1.2bil in FY20. Although SDP’s FFB production growth was unexciting at -1.6% in FY21, the group benefited from strong palm product prices. Average CPO price realised surged by 46.6% to RM3,711/tonne in FY21 from RM2,532/tonne in FY20.

• SDP’s average CPO price realised of RM3,711/tonne in FY21 was below MPOB’s average spot price of about RM4,417/tonne as the group sold forward a significant portion of its Malaysia CPO production at lower prices in late-FY20. Also, CPO price in Indonesia is nearly RM1,000/tonne weaker than Malaysia. Indonesia accounted for 38.8% of SDP’s upstream earnings in FY21.

• SDP’s downstream EBIT climbed by 41.7% to RM547.0mil in FY21 on the back of higher earnings from the bulk operations. EBIT margin was 3.4% in FY21 vs. 3.5% in FY20.

• After being affected by losses in Europe in 3QFY21, SDP’s downstream EBIT recovered in 4QFY21. Downstream EBIT rebounded to RM287.0mil in 4QFY21 from RM7.0mil in 3QFY21. EBIT margin improved to 11.9% in 4QFY21 from 0.3% in 3QFY21 in the absence of fair value losses. Recall that SDP’s Asia Pacific and Europe refineries recorded fair value losses on commodity contracts in 3QFY21. The fair value losses amounted to RM70.0mil in 3QFY21.

Source: AmInvest Research - 21 Feb 2022