Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with an unchanged fair value of RM4.40/share. Our fair value is based on a FY23F PE of 18x, which is the 5-year mean for large planters. We ascribe a 3-star ESG rating to SDP.

• SDP’s FY22 core net profit (ex-disposal gains) was within our forecast and consensus estimates.

• SDP has declared a final gross DPS of 6 sen, which brings total gross DPS to 16 sen for FY22 (FY21: 20.3 sen). This implies a yield of 3.7%. We forecast a lower gross DPS of 14 sen for FY23F, which translates into a yield of 3.2%.

• SDP’s core net profit fell by 8.7% to RM2.2bil in FY22 due to a 24.8% decline in upstream earnings. On a positive note, downstream EBIT surged by 49.7% to RM819mil in FY22 on the back of improved margins in the differentiated and bulk product operations in Asia Pacific. Downstream EBIT margin expanded to 4.3% in FY22 from 3.4% in FY21.

• SDP’s upstream division was affected by acute labour shortages in Malaysia and an increase in the cost of production. Due to the severe labour shortage, EBIT of the Malaysian operations plummeted by 76% to RM207mil in FY22.

• Also in spite of strong CPO prices, Indonesia EBIT slid by 12.7% to RM1.1bil in FY22 as sales volumes were affected by the ban on exports in May. In PNG, EBIT grew by a mere 1.6% to RM1.1bil as there were valuation losses on inventory in 3Q.

• SDP’s FFB production declined by 10% in FY22 mainly due to a 24% plunge in Malaysia. In Indonesia, FFB output improved by 7% in FY22 while in PNG, FFB production inched up by 1%.

• Average realised CPO price (group) climbed to RM4,456/tonne in FY22 from RM3,711/tonne in FY21. SDP’s average realised price in Malaysia was only RM4,472/tonne in FY22 vs. MPOB’s average price of RM5,126/tonne due to forward sales carried out at lower prices.

• Although SDP’s downstream division performed well on a yearly basis, EBIT fell by 67.9% QoQ to RM108mil in 4QFY22. This was due to weaker sales volumes and margins in Europe coupled with fair value losses on commodity hedges. EBIT margin slipped to 2.3% in 4QFY22 from 6.8% in 3QFY22.

• SDP is currently trading at a FY23F PE of 18x, which is marginally higher than its 2-year average of 17x.

Source: AmInvest Research - 20 Feb 2023