Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with an unchanged fair value of RM4.55/share, based on FY25F PE of 18x, which is the 5-year average for large-cap planters. We ascribe a 3-star ESG rating to SDP.

• SDL has declared a final gross DPS of 6.1 sen, which brings total gross DPS to 15 sen for FY23. We forecast a gross DPS of 16 sen for FY24F, which translates into a yield of 3.6%.

• SDP’s FY23 core net profit of RM733mil (ex-disposal gains of RM1.1bil) was 12% below our forecast and 38% short of consensus. SDP’s results were below our expectation due to higher-than-expected manuring and labour costs in 4QFY23.

• SDP’s core net profit plunged by 66.6% to RM733mil in FY23, dragged by lower palm product prices and weaker downstream earnings. We have reduced SDP’s FY24F net profit by 22.6% to account for softer plantation and downstream EBIT margins.

• Upstream EBIT in Indonesia tumbled by 43.5% to RM612mil in FY23 while earnings in Papua New Guinea (PNG) sank by 76.2%. On a positive note, the Malaysia upstream division recorded a 32.9% increase in EBIT in FY23 on the back of a 18% rebound in FFB production. FFB yields in Malaysia recovered in FY23 on the back of a higher number of estate workers.

• Average realised CPO price fell by 15.4% to RM3,772/tonne in FY23 from RM4,456/tonne in FY22. However, group FFB production rose by 6.1% in FY23 as strong output in Malaysia compensated for declines of 3% in Indonesia and 2% in PNG.

• Downstream EBIT (trading, bulk and differentiated products) contracted by 31.4% to RM562mil in FY23 as refining margins in Asia Pacific shrank. Downstream EBIT margin slipped to 3.4% in FY23 from 4.3% in FY22.

• Comparing 4QFY23 against 3QFY23, SDP’s core net profit decreased by 56.7% to RM145mil as downstream earnings retreated by 39.2%. SDP’s downstream division was affected by lower sales volume and processing margins in Asia Pacific in 4QFY23.

• Also, SDP’s FFB production edged down by 2.4% QoQ in 4QFY23 due to seasonal factors. Average CPO price was RM3,688/tonne in 4QFY23 vs. RM3,777/tonne in 3QFY23.

• SDP is currently trading at a pricey FY24F PE of 23x, which is higher than its 2-year average of 17x.

Source: AmInvest Research - 23 Feb 2024