• Overview. Sime Darby Plantation Berhad (SDPL) 2Q22 core profit improved by 16% YoY to RM1,318mn as higher profit contribution from the Downstream segment has partially compensated the decline in profit from Upstream segment due to 15%/14%/14% lower in FFB/CPO/PK production amid a 44%/40% increase in CPO/PK price during the period. The improved result from the Downstream segment was due to higher profits contribution from the bulk and differentiated segments from Asia Pacific operations and higher share of profits from JV of RM31mn vs. RM2mn in 2Q21. Nonetheless, on a QoQ basis, core profit fell by 38% on account of lower contribution from Upstream segment owing to 1) lower FFB production and OER resulting from acute shortage of 4,189 harvester or 38% against the total requirement of 11,159 harvester in Malaysian estates, and 2) the effects of the Domestic Market Obligations (DMO) implementation by the Indonesian government on palm oil exports. However, this was partly cushioned by higher sales volumes and higher margins from the Asia Pacific operations in Downstream segment.

• Against estimates: Inline. 1HFY22 core profit of RM1,318mn was within our estimates, making up 51% of our full-year forecast.

• Dividend. The Board declared an interim dividend of 10sen (FY21: 7.9sen), equivalent to a DY of 2.3% based on the current market price, payable on 18 November 2022.

• Outlook. We are expecting a sustainable performance for this financial year and next year though volatile raw commodity prices and intensified competition will pose a challenge to overall business. We like SDPL for its established market presence that involves the whole value chain of palm oil business, sound management, CSPO producer and one of the largest oil palm plantation companies by oil palm planted area.

• Our call. Maintain a BUY call with a new TP of RM5.03 against RM5.70 previously based on P/BV of 2.0x (historical low 5-yrs average) and FY23’s BV/share of RM2.51 as we roll our valuation and applying a lower historical 5- yrs average P/B after assuming a likely slow-down in CPO price and challenging business environment in 2H22 and in 2023. Our TP offers a 14.8% upside potential from the current market price.

Source: BIMB Securities Research - 24 Aug 2022