Sime Darby Plantations (SDPL) 1H23 core net profit came in within our estimates but fell short of consensus expectations due to higherthan-expected operating expenditure mainly higher fertiliser prices and labour costs. Declared an interim DPS of 3.25sen (vs. 10.0sen in 1H22), equivalent to 0.8% yield at current price. While we anticipate sustainable performance for this year, the risk of volatile raw commodity prices, subdued demand, and intensified competition in the edible oils market may pose challenges to SDPL's overall business outlook. Maintain our earnings forecasts, but with new Target Price (TP) of RM4.60 vs. RM4.62 previously (based on P/BV of 2.0x as we roll our valuation to FY24). SDPL is a HOLD.

• Within expectations. The subdued 1HQ23 headline PATAMI of RM449mn (-71% YoY) was dragged by higher operating expenses of RM7.85bn and finance costs. The adjusted core PATAMI of RM359mn (-72% YoY) matched our estimates but came in below consensus expectations, representing 52% and 33% of full-year estimates, respectively. The difference between reported earnings and core earnings are the fair value (FV) changes in commodities futures contract, forward forex contract, unrealised forex gain/losses, impairment and gain on disposal and write-off.

• Dividend. The group declared an interim DPS of 3.25sen (versus 10.0sen in 2Q22), equivalent to 0.8% yield at current market price. We consider this as below expectations, given previous years’ payouts of >80% (Table 1).

• QoQ. Core PBT improved by 41% to RM377mn, thanks to higher profit contributions from both the Upstream and Downstream segments, owing to: 1) an increase in FFB, CPO, and PK production, as well as the OER for operations in Malaysia and Indonesia - despite lower realised ASP (Table 2) and higher operating costs; and 2) a jump in sales volumes and improved margins in the Asia Pacific bulk and differentiated operations from Downstream segment.

• YoY/YTD. PBIT for the 2Q23 and 1H23 contracted significantly, decreased by 54% and 62% YoY to RM527mn and RM830mn, respectively, due to: 1) lower profit contribution from Upstream Operations (Malaysia and PNG), on account of lower ASP realized for palm products and higher operating costs, 2) lower result from Downstream segment that was affected by weaker profits from Asia Pacific bulk and differentiated refineries due to lower margins and demand, and 3) lower share of results of JV of RM6mn and RM8mn versus RM31mn and RM59mn in 2Q22/1H22 respectively.

• Outlook. We anticipate a sustainable performance for this year, mainly driven by higher upstream earnings on the back of an expected improvement in productions, encouraging ASP of palm products and lower costs, though moderated by weaker downstream earnings due to lower margins and demand. Note that SDPL is maintaining FFB growth guidance of 10-15% as it expects a recovery to materialize in the 2H23, supported by enhanced harvester position in Peninsular Malaysia and, Sabah and Sarawak by the end of September, that coincide with the peak production period from September to November.

• Our call. No change in earnings forecast. Maintain a HOLD call with new TP of RM4.60 (vs. RM4.62 previously); based on P/BV of 2.0x (historical low 5-yrs avg.) as roll our valuation to FY24. As such, we advise investors to take any stock price rally as an opportunity to lock in their profit.

Source: BIMB Securities Research - 24 Aug 2023