Investment Highlights

• We maintain SELL on Sime Darby Plantation (SDP) with an unchanged fair value of RM3.65/share, based on FY23F PE of 15x. We ascribe a 3-star ESG rating to SDP.

• SDP’s annualised 1HFY22 core net profit was within our forecast but 16% below consensus estimates. In spite of higher CPO prices, SDP’s EBIT fell by 10.7% QoQ to RM877mil in 2QFY22 due to increased CPO production costs in Malaysia coupled with Indonesia’s ban on CPO exports in May. Cost of CPO production in Malaysia climbed to RM2,900/tonne in 1HFY22 from RM1,900/tonne in 1HFY21.

• Comparing 1HFY22 against 1HFY21, however, SDP’s core net profit (ex-disposal gains of RM275mil) climbed by 31.4% to RM1.3bil on the back of strong palm product prices and higher downstream earnings.

• SDP’s average realised CPO price surged by 42.3% to RM4,868/tonne in 1HFY22 from RM3,422/tonne in 1HFY21. SDP’s average realised CPO price of RM4,868/tonne in 1HFY22 was below MPOB’s average of RM6,302/tonne due to forward sales and the Indonesian price discount.

• Upstream EBIT rose by 9.4% YoY to RM1.5bil in 1HFY22 driven by the PNG division. In spite of higher CPO prices, earnings of the Malaysian and Indonesian upstream units fell 39.1% YoY in 1HFY22.

• Malaysian upstream EBIT slid by 25.6% YoY to RM290mil in 1HFY22 due to higher production costs and a 25% plunge in FFB production. In Indonesia, upstream EBIT dived by 49.3% YoY to RM259mil in 1HFY22 as sales were affected by the ban on CPO exports in May.

• SDP’s FFB production declined by 15% YoY in 1HFY22. In Malaysia, the group’s FFB output contracted by 25% due to a shortage of workers. SDP’s FFB production shrank by 6% YoY in Indonesia in 1HFY22 while in PNG, FFB output edged down by 2%.

• On a positive note, downstream EBIT (trading, bulk and differentiated products) rose by 48.2% to RM375mil in 1HFY22 from RM253mil in 1HFY21. This was underpinned mainly by positive margins in the bulk and differentiated product segments. EBIT margin inched up to 4% in 1HFY22 from 3.7% in 1HFY21. Comparing 2QFY21 against 1QFY21, downstream EBIT expanded by 84.1% to RM243mil. EBIT margin was 4.6% in 2QFY22 vs. 3.3% in 1QFY22.

Source: AmInvest Research - 24 Aug 2022