Excluding exceptional gains totaling RM1bn for the disposal of land in Malaysia and disposal of interests in 2 subsidiaries in Indonesia, Sime Darby Plantation saw 9MFY23 core earnings tumble 55% YoY to RM773m, dragged by weaker earnings contribution from upstream Indonesia and PNG as well as downstream segments. In view of higher FFB production in the final quarter, the results were considered in line with our and the consensus full-year expectations, making up 68% and 70%, respectively. Maintain Neutral with an unchanged TP of RM4.02. A special dividend of 5.7sen was declared on 27th Oct.

• 3QFY23 revenue (QoQ: +11%, YoY: -11.5%). The group’s sales weakened by 11.5% YoY to RM4.8bn, as downstream sales shrank 14% despite stronger revenue recorded by upstream Malaysia (+3.3%) and upstream PNG (>100%). 3QFY23 average CPO price slipped from RM4,277 to RM3,777/mt (9MFY23: RM3,806/mt, YoY: -18%), contributed by Malaysia (RM3,993/mt), Indonesia (RM3,319/mt) and PNG (RM3,965/mt). 3QFY23 FFB production gained 14% YoY to 2.45m mt (9MFY23: 6.3m mt, YoY: +3%), mainly driven by stronger Malaysian production (+38%), partially offset by weaker production from Indonesia (-1%) and PNG/SI (-6%). Downstream segment was affected by the challenging market in Asian region due to stiffer competition.

• 3QFY23 core earnings rose 11%. Stripping out the exceptional items, the Group’s core earnings increased from RM413m to RM458m, driven by a strong turnaround in upstream Malaysia and stronger earnings from upstream Indonesia, which were partially offset by weaker earnings from upstream Indonesia and downstream segments. Although European operations performed well with higher margins, downstream segment saw a lower capacity utilization of 57% and 67% for both differentiated and bulk products, respectively, due to challenging Asian operations. 9MFY23 CPO production cost stood at RM2,615/mt.

• Outlook guidance. Management targets single-digit FFB production growth for FY23, led by a 14-15% growth in Malaysia and a slight increase in PNG, partially offset by lower production in Indonesia. It also aims for another single-digit FFB production growth for FY24 on the back of stronger FFB production from both Malaysia and Indonesia. Meanwhile, it is planning to recruit more harvesters for East Malaysia as it currently requires additional 400 and 150 workers for Sarawak and Sabah (short of 12%), respectively. Management sees no El Nino impact in Malaysia due to favourable weather pattern while Kalimantan and Southern Sumatra experienced a low rainfall period for the last 3 months, which could potentially reduce the production by up to 20%. On the fertilizer application, most operating regions have almost achieved 90%-100% completion. The replanting progress in Malaysia was 50% behind the target as it only managed to replant up to 12,000ha this year. Lastly, the group expects to see lower CPO production cost in FY24 on the back of lower fertilizer cost (saving of 20%) and higher production.

Source: PublicInvest Research - 27 Nov 2023