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. We have reduced SDP’s FY24F net profit by 9% to account for the impact of the disposal of its Indonesian units.

• SDP has proposed to sell PT Ladangrumpun Suburabadi (LSI) and PT Sajang Heulang (SHE) to PT Global Berkat Usahatama for IDR18tril (RM518mil) cash. The proposed disposal is pursuant to a settlement agreement with PT Asa Karya Multi Pratama (AKMP). PT Global Berkat was appointed by AKMP to buy LSI and SHE.

• In March 2022, AKMP filed a legal claim against SDP. AKMP alleged that SDP had interfered and instructed its Indonesian units, PT Minamas and PT Anugerah Sumbermakmur not to sell LSI and SHE to AKMP for IDR1.7tril (RM488.4mil).

• AKMP also alleged that a sale and purchase agreement had been established with PT Minamas and PT Anugerah and the down payment was effected for the sale. Subsequently, the down payment was returned to AKMP.

• We are neutral on the proposed disposal of LSI and SHE. Although SDP will record a one-off exceptional gain of RM107mil, it will no longer enjoy earnings contribution from LSI and SHE. LSI recorded a net profit of RM287.7mil in FY22 while SHE registered net earnings of RM5.9mil. Collectively, these accounted for 13% of SDP’s FY22 core net profit.

• We estimate that the proposed disposal would result in a 9% fall in SDP’s net profit in FY24F. The proposed disposal is expected to be completed in 4QFY23. SDP will be using the disposal proceeds of RM518mil for working capital requirements.

• Also, SDP is selling LSI and SHE at a cheap price. As a comparison, the disposal consideration of RM518mil translates to only 1.8x the combined net profit of RM293.6mil of the 2 companies. From an asset point of view, the disposal consideration translates into RM37,000/ha based on the planted areas of 14,000ha. This is higher than MP Evans’ purchase of 2,100ha of land in North Sumatra for RM30,439/ha in March 2023 but lower than TSH Resources’ sale of 13,215ha of land in North Kalimantan for RM51,379/ha in FY22.

• SDP said that the disposal consideration was derived on a “willing buyer, willing seller” basis and is justified after considering the financial and cash flow projections of LSI and SHE.

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

Source: AmInvest Research - 17 Apr 2023