• We initiate coverage on Sime Darby Plantations (SDPL), with a HOLD recommendation.

• SDPL aims to improve efficiency and drive operational excellence by “Mission 23:23”, which will result in higher yield numbers.

• We forecast a 3-year CAGR of 25% in earnings growth, although risk remains on CPO price scenario.

• We value the stock at RM4.50, applying a blended valuation of PE 30x and P/B multiple of 2.45x.

World’s largest oil plantation company

Post-listing in Nov 2017, SDPL has been the world’s largest plantation stock by planted land-bank with market capitalisation of c. RM30bn or 32% weighting in Malaysia’s FBM Plantation Index. In FYE June 2018, upstream division accounted for 26% and 90% of SDPL’s revenue and profit, whilst downstream segments accounted for 74% and 10% of revenue and profit.

Driving operational excellences by “Mission 23:23”

By year 2023, SDPL is aiming to achieve FFB yield of 23MT/ha and 23% OER. The Group also targets to improve the downstream segment contribution to 20% of the Group’s profit within the next 5-years vs. 10% in FY18. We forecast a PATAMI of RM906m and RM1.01bn for FY19 and FY20 assuming an average CPO price realised of RM2,280/MT for FY19 and RM2,350/MT for FY20.

Improve gearing and cash-flow

We project SDPL’s net gearing to reduce to below 0.40x by 2019 driven by its assets monetisation exercise and strong operating cash-flow. We believe there will be no more land-bank expansion in the near term as the Group will be focusing on replanting activities. As such, SDPL will be able to achieve its 50% dividend policy, which translates to 10sen per share in FY19 and F20.

Initiate with a HOLD call, TP: RM4.50

We initiate coverage on SDPL with a HOLD recommendation and RM4.50 TP. We apply a blended valuation based on SDPL’s average PER and P/B multiple methodology. Despite attaching a higher P/B than its peers, we argue that this is fair due to a healthier EBITDA margin and balance sheet versus peers. We also believe that its strategy blueprint of achieving: i) FFB yields of 23 MT/ha by year 2023, ii) OER of 23% by year 2023, and iii) 20% PBIT contribution from the downstream division within the next five years, will be successful in contributing to a higher earnings growth.

Source: BIMB Securities Research - 21 Dec 2018