Stripping out exceptional gains of RM196m from three land disposals in Malaysia, Sime Darby Plantation saw 1HFY23 core earnings tumble to RM273m, down 79% YoY, dampened by losses in upstream Malaysia and steep decline in Upstream PNG and downstream segments. The weak results were below our and the street full-year expectations, making up only 24% and 25%, respectively. Despite the disappointing results, we retain our earnings forecast as we expect to see a strong recovery in 2H on the back of stronger CPO prices amid high production season. Maintain Neutral with an unchanged TP of RM4.02. A first DPS of 3.25sen was declared for the quarter.

• 2QFY23 revenue (QoQ: +6%, YoY: -23%). The group’s sales weakened 23% YoY to RM4.3bn, as downstream sales shrank 27% despite stronger revenue recorded by upstream Malaysia (+84%), upstream Indonesia (+6.3%) and upstream PNG (+6.9%). 2QFY23 CPO prices contracted 28% YoY to RM3,765/mt (1HFY23: RM3,824/mt, YoY: -21%), contributed by Malaysia (RM4,096/mt), Indonesia (RM3,238/mt) and PNG (RM3,889/mt). 2QFY23 FFB production fell 2% YoY to 2.03m mt (1HFY23: 2.03m mt, YoY: - 2%), mainly dragged by weaker production from Indonesia (-6%) and PNG (- 1%) as the group accelerated replanting activities to address poorer yielding and ageing palm trees in Indonesia while Malaysian operations continued with rehabilitation efforts following the arrival of new workers. Lower OER were recorded in all operating countries except Malaysia.

• 2QFY23 core earnings tumbled 66%. Stripping out the exceptional items, the Group’s core earnings were down to RM204m, dampened by weaker contributions from upstream PNG (-89%) and downstream (-49%) while upstream Malaysia posted a second consecutive loss of RM25m due to higher operating costs from higher fertilizer prices and labour costs. 1HFY23 CPO production cost (inclusive windfall levy, ex-PK credit) was higher at RM2,800/mt (Malaysia: RM3,200/mt, Indonesia: RM2,300/mt and PNG: RM2,500/mt). The dismal performance for downstream was attributed to weaker sales margin recorded by the Asian bulk and differentiated operations due to stiffer competition, partially mitigated by higher profits posted by the European refineries due to easing gas prices and better sales volume.

• Outlook guidance. Management sees CPO prices may rise above RM4,000/mt level towards end of 3Q 2023. Despite the lower FFB production growth in the 1HFY23, management retains its FFB production target of high single-digit with Malaysia expected to grow by 10%-15% and high single-digit growth for both Indonesia and PNG. On CPO production cost, management expects to see lower production cost of RM2,500/mt for FY23 due to higher production despite higher fertilizer cost. On the fertiliser application, all regional countries have reached 80%-90% targets for the 1H. Meanwhile, only certain areas of Kalimantan have experienced dry weather pattern. The annual replanting target of 28,000ha is far behind the schedule. Lastly, 50% of Peninsular Malaysia production in 2H and 5% of production in FY24 have been locked at RM3,950/mt and above RM4,000/mt, respectively for forward sales.

Source: PublicInvest Research - 24 Aug 2023