Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with an unchanged fair value of RM4.30/share, which is based on a FY24F PE of 18x - the 5-year average for large-cap planters. We ascribe a 3-star ESG rating to SDP.

• SDP’s annualised 1HFY23 core net profit was within our forecast but 28% below consensus. SDP has declared an interim gross DPS of 3.3 sen (1HFY22: 10 sen) vs. our FY23E gross DPS of 14 sen (FY22: 16 sen), which implies a yield of 3.2%.

• SDP’s core net profit (ex-disposal gains of RM196mil) dived by 80.5% YoY to RM253mil in 1HFY23 due to weaker palm product prices, lower downstream earnings (trading, bulk and differentiated products) and higher CPO production costs. Also, SDP’s interest expense more than doubled YoY to RM101mil in 1HFY23 on rising interest rates.

• SDP’s Malaysia upstream division recorded a larger loss of RM25mil in 2QFY23 vs. RM21mil in 1QFY23 as fertiliser costs rose on a higher volume of application. On a yearly basis, the unit registered losses of RM46mil in 1HFY23 compared to an EBIT of RM290mil in 1HFY22.

• FFB production in Malaysia fell by 5% YoY in 1HFY23. Cost of CPO production (cost to customers) in Malaysia increased to RM3,200/tonne in 1HFY23 from RM2,900/tonne in 1HFY22.

• SDP realised an average CPO price of RM3,824/tonne in 1HFY23 against RM4,868/tonne in 1HFY22. FFB production slid by 3.1% YoY in 1HFY23. Group cost of CPO production was RM2,800/tonne in 1HFY23 compared with RM2,400/tonne in 1HFY22.

• SDP’s downstream EBIT plunged by 50.9% YoY to RM184mil in 1HFY23. EBIT margin declined to 2.5% in 1HFY23 from 4% in 1HFY22 as selling prices and sales volume slid. Comparing 2QFY23 against 1QFY23, downstream EBIT rebounded by 78.8% to RM118mil. EBIT margin improved to 3% in 2QFY23 from 1.9% in 1QFY23.

• SDP is currently trading at a fair FY24F PE of 18x, which is marginally higher than its 2-year average of 17x.

Source: AmInvest Research - 24 Aug 2023