• Overview. SDPL’s 1Q21 core PBT improved significantly to RM713m against RM298m in 1Q20 mainly attributed to 1) higher contribution from upstream operations, as margin increased significantly (refer Table 2) on higher ASP realised of palm products, 2) improved result from Downstream segment due to higher contribution from bulk business and trading operations in Asia Pacific and higher premiums from sale of RSPO products, and 3) lower finance cost of RM14m vs. RM38m in 1Q20. On quarterly basis, the improved results from upstream segment have negated the lower contribution from downstream segments on account of higher selling prices realised and better cost control.

• Key highlights. Plantation PBIT increased to RM543m in 1Q21 (+55% mom and 88.5% yoy) as higher ASP realised of CPO and PK during the period has partially cushioned the impact of declining and slower growth in FFB production during the period (Table 2 and 3).

• Against estimates: Above. Adjusted for the FV losses/gains on commodities futures contract, forward forex contract, unrealised forex gain/losses, impairment, gain on disposal and write-off, totalling RM63m against RM309m in 1Q20, core PBT came-in above our estimates.

• Outlook. Although ESG issues would continue to be the main key concerns for plantation industry, we believe that any earnings downside would be mitigated by the higher price anticipated for palm product prices in upstream segment which are currently trading above RM4,000/MT, supported by growth in production especially from Indonesian estates.

• Our call. Given the encouraging result, we tweaked our FY21/22 earnings forecast higher to RM1,391m and RM1,349m respectively from RM903m RM963m with new TP of RM5.00 (P/B of 2.5x and BV/share of RM2.00); as we revisit our assumptions on palm product prices, margins, costs and expenses to be more reflective to our current and future expectations. As we now see potential upside from here in the stock with upside of 13%, we upgrade our recommendation from HOLD to BUY.

Source: BIMB Securities Research - 21 May 2021