Sime Darby Plantation saw its 1QFY21 core earnings doubling to RM438m on the back of stronger earnings contribution from upstream plantation business in Indonesia and PNG/SI and downstream segment. The results were in line with our expectation but it surpassed the street expectation, making up 29% and 32%, respectively. No dividend was declared for the quarter. Meanwhile, the Group believes the current CPO price momentum may sustain till Sept as global vegetable oil supplies remain tight. Maintain Neutral with a higher TP of RM5.14 based on 34x FY22 EPS following our recent CPO price revision.

• 1QFY21 revenue (QoQ: +0.9%, YoY: +21%). The group’s sales grew 21% YoY to RM3.6bn, driven by stronger sales contributions from upstream Indonesia (YoY: +10%) and downstream (YoY: +33%), which were offset by weaker performance in upstream Malaysia (YoY: -37%) and upstream PNG (- 34%). 1QFY21 Average CPO prices rose 22% YoY to RM3,185/mt, contributed by Malaysia (RM3,026/mt), Indonesia (RM2,886/mt) and PNG/SI (RM3,890/mt). 1QFY21 FFB production improved by 4% YoY to 2.2m mt, bolstered by Indonesia (YoY: +20%), attributed to the strong recovery from the impact of the 2019 El-Nino event. Malaysian production (YoY: -2%) continued to suffer from the labor shortage issue and PNG/SI (-1%) was dragged by high rainfall experienced in certain areas.

• 1QFY21 core earnings (QoQ: +16.8%, YoY: >100%). Stripping out the non core items, the Group core earnings doubled to RM438m boosted by stronger earnings contribution from all key segments except upstream Malaysia (YoY: -44%). Upstream Indonesia soared from RM39m to RM190m on the back of an increase in both FFB production and CPO prices. Upstream PNG/SI surged from RM74m to RM233m on the back of the steep increase in CPO margin. Downstream rose 20% YoY to RM107m as trading segment nearly tripled to RM37mn and a strong turnaround in bulk business thanks to improved sales margins in Europe and Africa while Asian region benefitted from the market price uptrend.

• Outlook guidance. Management targets at least 5% FFB production growth for FY21 on the back of double-digit growth from Indonesian production and single-digit growth from PNG/SI production. Meanwhile, Malaysian operation is facing worsening worker shortage issue (1QFY21: shortage of 5,139 workers, which equates to 20%-25% of total workforce in Malaysia) as some workers returned to their home countries. The Group has been more aggressive in recruiting local workers with 3k workers added recently. On the fertilizer application, about 85% of the quarterly programme was completed in Indonesia while it was slower in Malaysia due to logistics issue. The Group has also locked in 10% of Malaysian CPO sales for 2022 at RM3,300/mt. On the CPO production cost, it averaged at RM1,800/mt (Malaysia: RM1,900/mt, Indonesia: RM1,650/mt and PNG/SI: RM1,700/mt). Management also shared that Indonesian government may lower its CPO levies in the near-term as it has secured enough subsidy for biodiesel.

Source: PublicInvest Research - 21 May 2021