SIME Darby Plantations (SDPL) 1Q23’s PATAMI of RM69mn (QoQ: - 88%, YoY: -90%) was below our and consensus estimates accounting for only 3% and 4% of full year forecast respectively. Following the results and the projected increase in operational expenses and demanding business climate in 2023, we revised lower our FY23 and FY24 earnings forecast and hence, downgrade our call from a BUY to a HOLD with a new TP of RM4.62 versus RM5.03 previously.

• Below expectations. SDPL’s 1Q23 PATAMI of RM69mn (QoQ: - 88%, YoY: -90%) was below our and consensus’ expectations. The difference between reported earnings and core earnings is the fair value (FV) changes in commodities futures contract, forward forex contract, unrealised forex gain/losses, impairment and gain on disposal and write-off.

• QoQ. On a quarterly basis, PBT fell by 66% on account of lower contribution from both Upstream and Downstream segments owing to 1) lower FFB production and OER resulting from lingering effects from acute labour shortage (skills harvester) that has impacted Malaysian productivity amid higher rainfall and floods in Indonesia and PNG that had affected crop recovery and mills’ operational efficiency, 2) lower CPO price realised, and 3) lower profit contribution from Downstream segment due to lower sales volumes and margins from the Asia Pacific bulk and differentiated operations.

• YoY/YTD. SDPL’s 1Q23 PBT contracted significantly to RM268mn against RM1,140mn in 1Q22, due to 1) lower contribution from upstream operations, as margin decreased significantly to 33.2% from 236% in 1Q22 - on lower production and ASP realised of palm products, and production costs, 2) lower result from Downstream segment was due to the decline in sales volume from Asia Pacific bulk operations and lower sales margins from the Asia Pacific bulk and differentiated operations, 3) lower share of results of JV of RM2m versus RM28m in 1Q22, and 4) higher finance costs of RM52mn vs. RM20mn in 1Q22.

• Outlook. We see a tougher outlook for SDPL’s near-term prospects given volatility in CPO price and slow recovery in production amid stiff competition from other edible oils which may pose a challenge to overall business.

• Our call. Due to the projected increase in operational expenses and demanding business climate in 2023, we revised lower our FY23/FY24 earnings forecast to RM689mn/RM550mn respectively from RM2,025mn/RM1,326mn previously. This largely came from higher operational costs assumptions at upstream segment and lower margins for downstream segment. Hence, downgrade on our call from a BUY to a HOLD with new TP of RM4.62 versus RM5.03 previously based on P/BV of 2.0x (hist. low 5-yrs avg.) and FY23’s BV/share of RM2.31. As such, we advise investors to take any stock price rally as an opportunity to lock in their profit.

Source: BIMB Securities Research - 25 May 2023