Highlights

• SDPlant is a globally integrated plantation group involved in the entire span of the palm oil value chain. It is the world’s largest oil palm plantation company by oil palm planted area and CSPO producer (with ~19% market share of the global CSPO production).

• SDPlant’s 5-year strategy blueprint emphasises on growth and competitive strategies, which targets to:

• Improve FFB yield and OER (to 25 mt/ha and 25% by 2025 from 19 mt/ha and 21.3% in FY17) and bring down production cost at the upstream plantation division; and

• Increase PBIT contribution from downstream division (to 20% by FY25 from 5.2% in FY17).

• Post restructuring exercise, SDPlant has net debt and net gearing of RM7.4bn and 0.54x, respectively. We project SDPlant’s net gearing to reduce to below 0.5x by FY19, underpinned by its strong operating cash flow.

Risks

• (1) Lower-than-expected FFB production; (2) Sharp decline in prices of edible oils (including palm oil); (3) Acute labour shortage; (4) Imposition of import tariffs/duties by major palm oil consuming countries; and (5) Volatile raw material prices, which will in turn hurt profitability of downstream segment.

Forecasts

• We project Sime Darby Plantation’s core net profit to expand by 14.5%, 9% and 8% to RM1.27bn, RM1.39bn and RM1.5bn in FY18-20, underpinned mainly by: (1) The absence of lingering impact from El Nino, which will in turn result in higher FFB production and a slightly lower production cost; and (2) Better profitability at the downstream operation.

• We project DPS of 13-15 sen p.a. (translating to a dividend yield of 2.3-2.6% p.a. based on reference price of RM5.59/share), assuming a payout ratio of 70% (in line with its historical payout ratio of circa 70%)

Rating

Initiate with HOLD recommendation, TP: RM5.72

• While we like SDPlant for its established market presence and track record in the oil palm plantation industry, sound management team, and low EV/ha (relative to its large cap peers), we believe near-term upside is capped by higher P/E valuations (FY17-19 P/E of 25-30x, higher than its large cap peers of 22-24x).

Valuation

• We initiate coverage on Sime Darby Plantation with a HOLD recommendation and a sum-of-parts TP of RM5.72 (translating to an upside of 2.3%). We value upstream plantation business at 28x FY19 earnings and downstream plantation business at 2x P/B.

Source: Hong Leong Investment Bank Research - 29 Nov 2017