Sime Darby Plantation saw its 1QFY22 core earnings surging 53% YoY to RM671m on the back of stronger earnings contribution from all core businesses except upstream Indonesia. The results made up 25% and 26% of our and the consensus full-year expectations, respectively. Despite the recent removal of Indonesia’s palm oil export ban, management shared that there will be domestic market obligation in place to safeguard the domestic cooking oil supplies. No dividend was declared for the quarter. Maintain Neutral with an unchanged TP of RM4.60 based on 18x FY23 EPS.

• 1QFY22 revenue (QoQ: -21.1%, YoY: +19.3%). The group’s sales advanced 19.3% YoY to RM4.4bn, mainly driven by stronger sales contribution from downstream segment (YoY: +27.9%), which were partly offset by weaker sales from upstream Malaysia (YoY: -24%), upstream Indonesia (YoY: -6.6%) and upstream PNG/SI (YoY: -75.3%). 1QFY22 Average CPO prices jumped 40% YoY to RM4,465/mt, contributed by Malaysia (RM4,122/mt), Indonesia (RM4,112/mt) and PNG (RM5,527/mt). 1QFY22 FFB production fell 13% YoY to 1.9m mt, as weaker production recorded in Malaysia (YoY: -16%) and Indonesia (YoY: -19%), was partially offset by higher production from PNG (YoY: +1%).

• 1QFY22 core earnings jumped to RM671m. Stripping out the non-core items, the Group’s core earnings surged 53% YoY to RM671m boosted by stronger earnings contribution from all key segments except upstream Indonesia (YoY: -19.5%), which was hit by cost pressure. At the PBIT level, Upstream Malaysia rose 11.1% YoY to RM271m. Upstream PNG/SI earnings nearly doubled to RM462m, bolstered by a strong increase in palm oil margin. Downstream earnings gained 23.4% YoY to RM132m, led by the Asian bulk operations (YoY: +40%), which benefitted from RSPO premiums on CPKO sales as well as trading business (YoY: +100%).

• Outlook guidance. The Group expects a decline of up to 5% in FY22 FFB production, mainly dragged by lower Malaysian production while it remains positive on FFB production growth in Indonesia and PNG/SI. The weak production in Malaysia is mainly attributed to the acute labour shortage of about 3,545 harvesters (32% of total requirement). Meanwhile, management is targeting recruitment of 3k-4k foreign workers and they are expected to arrive by July. The impact of new minimum wage at RM1,500/mt starting from May 2022 will increase wage cost by about RM80m-90m based on 24k workers in Malaysia. On fertilizer application, only Malaysian plantation was behind the schedule (at 40% of the 1QFY22 programme) but this is expected to catch up by July. 1QFY22 CPO production cost stood at RM2,500/mt (Malaysia: RM2,500/mt, Indonesia: RM2,000/mt and PNG: RM2,000/mt) and is expected to average at RM2,000/mt for FY22. Lastly, 50% of Peninsular CPO production was locked in at RM4,700/mt while 40% of PNG production was locked in at RM6,300/mt under the forward sales policy.

Source: PublicInvest Research - 23 May 2022