Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with a lower fair value of RM4.30/share vs. RM4.40/share previously. Our fair value for SDP is now based on a rolled-forward FY24F PE of 18x, the 5-year mean for large planters. We ascribe a 3-star ESG rating to SDP.

• SDP’s 1QFY23 results were 50% below our earlier FY23F earnings and consensus. The group’s core net profit fell short of expectations due to lower-than-expected upstream and downstream earnings and higher-than-estimated interest and tax expenses. We have cut SDP’s FY23E net earnings by 50.4% to reflect all of these. We have also reduced SDP’s FY24F net profit by 8.3% to account for lower margins in the upstream and downstream divisions.

• SDP’s core net profit plunged by 89.7% YoY to RM69mil in 1QFY23, dragged by lower palm product prices, a fall in downstream (trading, bulk and differentiated products) earnings and increases in interest and tax expenses. Interest expense more than doubled YoY to RM52mil in 1QFY23 as interest rate rose to 5.3% p.a. from 1.9% p.a. in 1QFY22.

• Upstream earnings plummeted by 73.8% YoY to RM220mil in 1QFY23. Average CPO price slid by 12.9% to RM3,887/tonne in 1QFY23 from RM4,465/tonne in 1QFY22. The Malaysian upstream division swung into a loss of RM21mil in 1QFY23 from an EBIT of RM224mil in 1QFY22. The unit was affected by an 11% drop in FFB production and higher fertiliser costs.

• Average CPO price realised was RM4,148/tonne in Malaysia in 1QFY23, which was marginally higher than MPOB’s average price of RM3,997/tonne. This was due to forward sales of CPO carried out at higher prices. In Indonesia, average CPO price realised was RM3,455/tonne in 1QFY23 while in PNG, average CPO price realised was RM4,034/tonne.

• FFB production slid by 5% YoY in 1QFY23. In Malaysia, FFB output fell by 11% while in Indonesia and PNG, FFB production inched up by 1% each.

• Although SDP has been receiving foreign workers in Malaysia since late-FY22, the positive impact on FFB production would only be seen in 2HFY23 as the workers need 2 to 3 months to be trained.

• SDP’s downstream EBIT halved YoY to RM66mil in 1QFY23, dragged by a fall in selling prices and demand in Asia Pacific. EBIT margin slipped to 1.9% in 1QFY23 from 3.3% in 1QFY22.

• SDP is currently trading at a fully valued FY24F PE of 19x vs. its 2-year average of 17x.

Source: AmInvest Research - 25 May 2023