Sime Darby Plantation saw its 9MFY21 core earnings tripling to RM1.7bn on the back of stronger earnings contribution from all core businesses except upstream Malaysia. The results made up 80% and 84% of our and the consensus full-year expectations, respectively. In view of lower production and softer CPO prices in the next 2 months, we retain our FY21F earnings forecasts. No dividend was declared for the quarter. Maintain Neutral with an unchanged TP of RM4.57 based on 20x FY22 EPS.

• 3QFY21 revenue (QoQ: +14.7%, YoY: +59.1%). The group’s sales advanced 59% YoY to RM5bn, driven by stronger sales contributions from upstream Indonesia (YoY: +115%) and downstream (YoY: +71%), which were partly offset by weaker sales from upstream Malaysia (YoY: -17.4%) and upstream PNG (YoY: -76%). 3QFY21 Average CPO prices jumped 51% YoY to RM3,770/mt (9MYFY21: RM3,545/mt, YoY: +43%), contributed by Malaysia (RM3,611/mt), Indonesia (RM3,483/mt) and PNG (RM4,475/mt). 3QFY21 FFB production fell 2% YoY to 2.34m mt (9MYFY21: 7m mt), as weaker production recorded in Malaysia (YoY: -10%), was partially offset by an increase in both Indonesia (YoY: +8%) and PNG (YoY: +7%).

• 3QFY21 core earnings surged to RM646m. Stripping out the non-core items, the Group core earnings surged 3-fold to RM646m boosted by stronger earnings contribution from all key segments except downstream segment. At the PBIT level, Upstream Malaysia increased by 42% YoY to RM328m. Upstream Indonesia jumped 4-fold to RM331m on the back of an increase in both FFB production and CPO prices. Upstream PNG/SI registered profit of RM243m compared to a loss of RM33m last year. Downstream earnings tumbled 90% YoY to RM7m, after incurring losses in the differentiated and trading segments due to unrealized loss on commodity hedges as well as weaker margins.

• Outlook guidance. Management sees a stagnant FFB production growth for FY21 and a low single-digit growth for FY22F as the foreign labour shortage issue may persist. Cost of production for the 9MFY21 averaged at RM1,750/mt (Malaysia: RM1,900/mt, Indonesia: RM1,550/mt and PNG RM1,800/mt) and it is expected to inch up by 10%-15% for 2022 as fertilizer cost jumped 30%-40% since few months ago. Commenting on the impact of taxation on prosperity tax, management views the impact is small as there are only two subsidiaries will be subject to the one-off taxation. Meanwhile, it reckons that the impact from the taxation on foreign source income is quite material as it made up more than 55% of the group’s bottomline. Meanwhile, the first batch of 200-300 foreign workers are expected to arrive in early- 2022, which will help resolve its worsening foreign worker shortage issue (3QFY21: 7,000 workers vs 2QFY21: 6,093 workers). About 35% of production from Peninsular Malaysia has been locked in at RM3,500/mt for 2022. Lastly, the capex for FY22 is slightly higher as the Group plans to accelerate its replanting activities from 13k ha to 25k ha next year.

Source: PublicInvest Research - 19 Nov 2021