• Overview. SDPL’s 1Q22 PBT improved significantly to RM1,043m against RM776m in 1Q21 driven by 1) stronger contribution from upstream operations, as margin increased significantly (refer to Table 2) on higher ASP realised of palm products, 2) improved result from Downstream segment due to better refinery and trading margins generated from Asia Pacific operations amid higher premiums from the sale of RSPO products, and 3) higher share of results of JV of RM28m vs. RM13m in 1Q21. However, on a qoq basis, PBT fell slightly or by 1% on account of lower contribution from Indonesia’s upstream segment due to the effects of the Domestic Market Obligations (DMO) implementation and weaker contribution from downstream segments on lower sales volumes and margins pressure, no thanks to escalating energy costs in Europe. This was partly cushioned by improved margins from the Asia Pacific operations however.

• Against estimates: Above. 1QFY22 core profit of RM814m came in above our and consensus’ forecast or at 35% and 31% respectively.

• Outlook. We are expecting a better performance in this financial year to be supported by higher palm product prices, although volatile raw materials prices and intensified competition will pose a challenge to overall business. Although there could be some earnings dilution under Indonesia’s export ban, DMO rules, and export and levy structure, we believe that the higher CPO price realises and stable demand will partly offset and cushion the impact. We expect CPO price to remain firmly on the upside to trade above RM5,000/MT for the rest of 1H22, many thanks to the supply chain disruptions as a result of Russian-Ukraine conflict and the tight supply situation of its substitute oils.

• Our call. Maintain a BUY with new TP of RM5.70 against RM5.50 previously based on P/BV of 2.5x and BV/share of RM2.28. We raised our FY22/23 earnings forecast higher to RM2.6b and RM2.0b respectively from RM2.3b and RM1.7b previously; as we made adjustment on margins, costs and expenses to be more reflective of current and future expectations. We also revised lower our effective tax rate to 26% from 29.8% previously; in line with management guidance.

Source: BIMB Securities Research - 23 May 2022