Highlights

• SDPlant’s near-term upside will likely be capped by uncertainties on EU’s potential move to ban palm-based biofuels by 2021 and its pricey valuations. However, we remain positive on its longer term prospects, underpinned by its accelerated replanting efforts (which will translate to higher oil yield over the longer term), and efforts to improve profitability at the downstream division.

• Accelerated replanting started paying off … Witnessed by a PBIT contribution of RM48m in FY17. To achieve its “mission 25:25” (i.e. average age of ~10 years, with FFB yield of 25mt/ha and OER of 25%) by 2025, SDPlant is embarking on accelerated replanting (with replanting rate of 5-7%) with high yielding planting materials.

• Replanting aside… We note that SDPlant is also working towards lower production cost, via further mechanization, which will in turn lower labour and overhead costs, and increase palm productivity.

• Downstream performance to improve gradually … SDPlant has plans to further increase PBIT margin and PBIT contribution from downstream division (to 20% by FY25 from 5.2% in FY17), and such target would be achieved by: (1) Shifting into high margin specialty products (which carry superior margins relative to other generic products); Deriving full value from CSPO through collaboration with smallholders and working towards fully segregated and traceable refineries.

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 for now, pending release of 2QFY18 results on 22 Feb 2018.

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. We value the upstream plantation business at 28x FY19 earnings and downstream plantation business at 2x P/B.

Source: Hong Leong Investment Bank Research - 20 Feb 2018