Investment Highlights

• Maintain HOLD on Sime Darby Plantation (SDP) with a lower fair value of RM5.20/share. Our fair value implies an FY19F PE of 30x. We have reduced SDP's FY18F net profit by 8.4% to account for a lower CPO price assumption of RM2,450/tonne vs. RM2,750/tonne previously and weaker EBIT margin. SDP’s EBIT margin is expected to be eroded by weak performances from Indonesia and PNG in FY18F.

• SDP's 9MFY18 core net profit was below our expectations and consensus estimates. SDP’s core net profit plunged by 48.5% QoQ to RM221mil in 3QFY18 as EBIT of the Indonesia unit dived by 92.4%. The Indonesia division was affected by a severe drop in FFB production due to floods in Sumatra in 3QFY18.

• Comparing 9MFY18 against 9MFY17, SDP's core net profit rose by 2.2% YoY to RM898mil underpinned mainly by an 18.6% increase in the EBIT of the Malaysia unit. The healthy performance of the Malaysia division compensated for the poor results from Indonesia, Papua New Guinea (PNG) and Liberia.

• EBIT of the Indonesia division fell by 40.4% from RM456mil in 9MFY17 to RM272mil in 9MFY18 due to a 9% drop in FFB production and 10.2% fall in average CPO price. The Indonesia unit realised an average CPO price of RM2,777/tonne in 9MFY17 to RM2,494/tonne in 9MFY18. The Indonesia unit was affected by aggressive replanting in Kalimantan and floods in Sumatra in 9MFY18.

• The PNG division recorded a lower EBIT of RM115mil in 9MFY18 vs. RM210mil in 9MFY17 dragged by lower CPO production and price. Average CPO price of the PNG unit slipped by 14.1% from RM3,123/tonne in 9MFY17 to RM2,682/tonne in 9MFY18.

• On a positive note, losses in Liberia declined from RM94mil in 9MFY17 to RM62mil in 9MFY18 in the absence of provision for stocks.

• Group FFB production rose by 6% YoY in 9MFY18. The 6% YoY increase in FFB production in 9MFY18 was driven by the Malaysia unit, which recorded a 19% surge in output. This helped compensate for a 9% fall in FFB production in Indonesia and 7% decline in FFB output in PNG. The Indonesia and PNG units were hit by floods in 3QFY18.

• On a group basis, SDP's average CPO price slid by 9% from RM2,8,61/tonne in 9MFY17 to RM2,604/tonne in 9MFY18.

• SDP's group production cost was RM1,600/tonne (all-in) in 9MFY18. Production cost of the Malaysia unit was RM1,400/tonne in 9MFY18 while the Indonesia division recorded a production cost of RM1,700/tonne. Production cost of the PNG division was RM1,900/tonne in 9MFY18.

Source: AmInvest Research - 1 Jun 2018