• SDPL recorded a PATAMI of RM74m on the back of 18% drop in revenue to RM3.0bn. Profit was impacted by a shortfall from upstream segment, on lower average selling price of CPO and PK realized, aided by higher finance costs.

• However the impact on earnings was partially cushioned by the improved performance of downstream segment. Overall, results were below our expectation.

• On quarterly basis, revenue and PBT declined 14% and 49% respectively mainly attributable to lower production and ASP realized of PK, aided by reduced contribution from downstream segment.

• We tweaked our FY19 and FY20 earnings forecast lower with an unchanged TP of RM5.03. Maintain HOLD.

Overall results were below expectations

SDPL posted a lower profit of RM74m for 1Q19 vs. RM249m in 1Q18 (quarter ended 31st Mar’18). The lower profit was due to lower contribution from plantation operations on account of lower CPO and PK prices realised of RM1,998/MT (-19%) and RM1,322/MT (-38%) respectively. This was also aided by the non-recurring profit of RM28m recorded in 1Q18 relating to the gain on sale of land in Melaka, and higher Group’s finance costs of RM58m vs. RM17m in 1Q18 (due to higher level of borrowings and higher interest rates). However, earnings performance was cushioned by higher downstream profit, mainly attributable by bulk business due to higher sales volume and better margins resulting from favourable import duties in India and zero export levies in Indonesia since Dec 2018 (Table 2).

Qoq performance also lower

On quarterly basis, revenue and PBT declined 14% and 49% respectively mainly due to lower contribution from Upstream operations on lower FFB, CPO and PK production as well as average PK price realised (Table 3). The weaker performance was also contributed by reduced contribution from downstream operations, impacted by lower margins and sales volumes as well as FV loss on commodity hedges. However, the higher profits from the differentiated and bulk operations on better margins and higher volume partially cushioned the decline in downstream segment’s PBT.

Revised earnings forecast with an unchanged TP of RM5.03

Given the challenging business environment and lower trend of palm product prices, we adjusted our margins lower and hence, revised our earnings forecast for FY19 and FY20 to RM727m and RM874m respectively from RM906m and RM1,014m. Nonetheless, we maintain our target price of RM5.03 and retain our HOLD recommendation.

Source: BIMB Securities Research - 3 Jun 2019