Investment Highlights

• We upgrade our recommendation on Sime Darby Plantation (SDP) to HOLD from SELL with a higher fair value of RM4.40/share vs. RM3.65/share previously. We raise our PE assumption for SDP from 15x to 18x, in line with its 10-year mean.

• We increased the PE assumption for SDP as the risk of SDP losing customers is easing. We reckon that the US Customs and Border Protection (CBP) would be lifting the ban on SDP’s Malaysian palm products soon. The PE of 18x is in line with our assumption for the other bigplanters such as IOI Corporation and KL Kepong. We ascribe a 3- star ESG rating to SDP.

• SDP’s labour shortage in Malaysia is anticipated to ease in FY23F. At the peak, SDP faced a shortage of 8,000 workers in Malaysia. In FY22, the group received 2,800 workers from Indonesia and Nepal. SDP is expected to receive another 7,000 workers in FY23F. We believe that it takes about 2 to 3 months to train the workers.

• Hence, we reckon that SDP’s FFB production in Malaysia would start improving from 2HFY23 onwards. On a group basis, we have assumed that SDP’s FFB output would rise by 5% in FY23F compared to a decline of 10.5% in FY22E. We think that the Malaysia upstream division would swing into the black in 2HFY23. Recall that the unit recorded a loss of RM145mil in 3QFY22.

• We believe that SDP’s cost of CPO production per tonne would remain flat at RM2,300/tonne (group basis) in FY23F. A higher volume of CPO production is expected to compensate for increased costs of wages and fertiliser. The cost of wages is envisaged to rise by 5% to 10% in FY23F due to a larger workforce.

• SDP has not lost customers since Cargill in February 2022. The US CBP is currently reviewing SDP’s submissions. Recall that SDP’s Malaysian palm products were banned by the US CBP in December 2020.

• We forecast SDP’s capex to be RM1.5bil in FY23F, similar to FY22E. We reckon that more than half of the capex would be for replanting and workers’ housing while the balance would be for the group’s new palm refinery in Indonesia. The new palm refinery, which will be located in North Sumatra, is estimated to cost RM600mil in total.

• SDP is currently trading at a FY23F PE of 18x vs. its 2-year average of 16x.

Source: AmInvest Research - 17 Jan 2023