Investment Highlights

• Maintain HOLD on Sime Darby Plantation (SDP) with an unchanged fair value of RM5.60/share. Our fair value implies a FY19F PE of 28x. SDP is currently trading at FY18F PE of 28.9x and FY19F PE of 27.4x.

• A few days ago, SDP submitted its interest to buy Ruchi Soya, which is one of the largest agri companies in India. Ruchi Soya has a 19% market share in the edible oils industry in India. At the second stage, SDP will be required to submit its pricing for the purchase of Ruchi Soya. We understand that many large agri companies including Wilmar International have submitted their bids for Ruchi Soya. Ruchi Soya's bankers will decide on the winning bid in one to two months from now.

• Ruchi Soya is listed on the India Stock Exchange and has a market capitalisation of INR5,729.8mil or US$88.1mil. According to Bloomberg, Ruchi Soya recorded a net loss of US$195.4mil in FYE3/17. The group has huge net debts of US$888.3mil.
• SDP's 1HFY18 results were within our expectations and consensus estimates. The group's core net profit grew by 44% YoY to about RM677mil in 1HFY18 underpinned mainly by a 78.9% surge in the EBIT of the Malaysia upstream unit. SDP has changed its financial year-end from June to December. For ease of comparison, we have kept SDP's year-end at June for now.
• Included in SDP's 1HFY18 net profit were exceptional items of RM771mil. These consisted of a RM676mil gain on the disposal of 1,878 acres of land in Vision Valley to Sime Darby Property Bhd and a reversal of donation expense of RM95mil.

• EBIT of the upstream unit expanded by 40.4% YoY in 1HFY18 on higher CPO price and production while EBIT of the downstream division declined by 26.4% YoY to RM134mil in 1HFY18. The downstream division was affected by lower refining margins. According to the Bursa Announcement, changes in Malaysia's cooking oil quota and subsidy, export duty structure and shipment delays in the month of December 2017 had also contributed to the fall in downstream EBIT.

• Average CPO price realised for the group was RM2,672/tonne in 1HFY18 compared with RM2,725/tonne in 1HFY17. SDP's group FFB production rose by 12% YoY in 1HFY18.

• Breaking it down geographically, SDP's FFB output in Malaysia grew by 25% YoY in 1HFY18 while in Indonesia, FFB production slid by 5%. The Indonesia unit was affected by replanting in Kalimantan and floods in Sumatra. PNG achieved a marginally lower FFB output YoY in 1HFY18. Malaysia accounted for 70.9% of upstream EBIT in 1HFY18 while Indonesia accounted for an additional 25.7%. PNG made up the balance 7.6% of upstream EBIT. The Liberia operations recorded a loss of RM43mil in 1HFY18 (1HFY17: RM27mil loss).

• SDP's group production cost was RM1,681/tonne (all-in) in 1HFY18. The Malaysia operations recorded a production cost of RM1,456/tonne in 1HFY18 while the Indonesia unit registered a production cost of RM1,700/tonne. In PNG, the production cost was RM2,000/tonne in 1HFY18.

Source: AmInvest Research - 23 Feb 2018