• Overview. SDPL’s 1Q20 PATAMI came in higher yoy/qoq to RM394m mainly due to higher contribution from upstream and downstream segments aided by lower finance costs, gains on land disposal of RM262m in Malaysia and unrealised FV gain on commodity hedges. Higher CPO and PK realised prices and lower cost to consumer negated the lower FFB and CPO production, hence, improving the upstream margins to 42% from 14% in 1Q19 and -2% in 4Q19. On the other hand, higher profits of the refineries in Europe on improved sales margin and RM62m gain on fair value commodity hedges, offset the weaker performance in Asia Pacific operations that were affected by lower demand from India and China (Table 2).
• Key highlights. For 1Q20, the Group’s discontinuing operations registered net earnings of RM74m on the disposal of the 100% equity interest in SDP Liberia mainly arising from a reversal of foreign exchange reserves. The Group completed the disposal in Jan 2020.
• Against estimates: Inline. 1Q20 core profit came in within ours estimates.
• Outlook. Moving to 2Q20, we expect there is high possibility of margins squeeze in both downstream and upstream segments on account of lower palm product prices and slower demand if the Covid-19 pandemic worsens and prolongs.
• Our call. Maintain HOLD with TP of RM4.83 based on P/BV of 2.5x and BV/share of RM1.93. Given the challenging business environment of subdued demand and weak CPO prices, we revised our earnings forecast for FY20 lower to RM368m from RM472m previously, as we cut our ASP of palm products assumption for FY20F by 5%-7%.

Source: BIMB Securities Research - 27 May 2020