Highlights

• According to Starbiz, Sime Darby Plantation (SDPlant) is considering selling 25-49% stake in its Papua New Guinea unit (New Britain Palm Oil Ltd., NBPOL), and it has asked potential advisers for proposals of options for NBPOL, which includes, amongst others, relisting of the business.

• According to the press, SDPlant would seek a valuation for NBPOL of at least US$1.7bn, the amount it paid when it acquired the company in 2015.

• Recall, Sime Darby Plantation acquired NBPOL (a 100% RSPO certified planter) in Mar-2015. At that time, NBPOL had total landbank of 139,899 ha, planted with 86,542 ha of oil palm). Besides, NBPOL also has over 5,600 ha of sugar cane, 8,956 ha of grazing pasture, and operates 12 oil mills and 2 refineries in PNG and Liverpool, UK, as well as a seed production and plant breeding facility.

Comments

• Deliberations are at early stage and details of any potential transaction could change. Nevertheless, such move will unlock value of its landbank, hence potentially re-rate share price of SDPlant (in our view), given its low EV/ha relative to its large cap peers.

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

• Maintained.

Rating

HOLD ( ↔ )

• 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 (FY18-20 P/E of 25-29x, higher than its large cap peers of 22-24x).

Valuation

• Maintain sum-of-parts TP of RM5.72 (see Figure 1).

Source: Hong Leong Investment Bank Research - 29 Jan 2018