Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with a higher fair value of RM4.55/share vs. RM4.30/share previously. We have raised SDP’s FY24F net profit by 6% to account for a stronger average CPO price assumption of RM3,700/tonne compared to RM3,500/tonne originally.

• Our revised fair value is based on a FY24F PE of 18x, which is the 5-year average for large-cap planters. We ascribe a 3- star ESG rating to SDP.

• SDP’s 9MFY23 core net profit of RM588mil (ex-disposal gains of RM1,072mil) was within our forecast but 18% below consensus.

• SDP’s core net profit plunged by 64.3% YoY in 9MFY23 as palm product prices fell and cost of CPO production rose. Downstream earnings also declined in 9MFY23 due to softer demand and selling prices.

• SDP’s upstream units in Indonesia and Papua New Guinea (PNG) recorded declines in 9MFY23 EBIT, dragged by weaker selling prices, higher costs and lower FFB production. For 9MFY23 EBIT, Indonesia slid by 23.1% YoY to RM480mil while PNG dived 68.7% to RM293mil.

• On a positive note, SDP’s Malaysia upstream division recorded a larger EBIT of RM182mil in 9MFY23 vs. RM145mil in 9MFY22. FFB production improved by 9% in Malaysia while the cost of production per tonne declined. Average CPO price in Malaysia eased by 8% to RM4,068/tonne in 9MFY23 from RM4,439/tonne in 9MFY22.

• On a quarterly basis, Malaysia upstream swung into the black with an EBIT of RM207mil in 3QFY23 vs. a loss of RM25mil in 2QFY23. This was largely driven by a 43% surge in FFB production. Apart from seasonal factors, we attribute the rise in FFB output to improved worker productivity.

• Overall, SDP’s FFB production edged up by 2.9% YoY in 9MFY23. The group average realised CPO price declined to RM3,806/tonne in 9MFY23 from RM4,648/tonne in 9MFY22.

• SDP’s downstream EBIT plummeted by 44.7% YoY to RM393mil in 9MFY23. EBIT margin inched down to 3.4% in 9MFY23 from 5% in 9MFY22. Comparing 3QFY23 against 2QFY23 however, downstream EBIT rebounded to RM275mil from RM118mil due to higher sales volume and margins in Europe.

• SDP is currently trading at a fair FY24F PE of 17x, which is in line with its 2-year average.

Source: AmInvest Research - 27 Nov 2023