SDPlant’s 9MFY18 core net profit of RM961m (+13.5%) came in within expectations, accounting for 73.1-75.4% of consensus and our full-year forecasts. Briefing highlights include (i) every RM100/month change in minimum wage in Malaysia will raise its production cost by RM20m a year, (ii) replanting exercise to continue into FY19 (albeit at a slower pace), and (iii) SDPlant is ceasing further investment in Verdezyne Inc. and will incur provision of ~RM206m in 4QFY18. Maintain our earnings forecasts, SOP-derived TP of RM5.72, and HOLD rating on SDPlant.

Within expectations. 3QFY18 core net profit of RM335m (qoq: -11.6%; yoy: -11.1%) took 9MFY18 core net profit to RM961m (+13.5%). The results came in within expectations, accounting for 73.1-75.4% of consensus and our full-year forecasts.

QoQ. 3QFY18 core net profit declined by 11.6% to RM335m mainly on the back of (i) lower realised palm product prices and seasonally lower FFB production (-15.4%), which has in turn resulted in core operating profit at the upstream plantation segment declining by 49% to RM283m, and (ii) lower dividend income received from an investment.

YoY. 4QFY18 core net profit declined by 11.1% to RM335m mainly on the back of a 4.9% decline in FFB production and lower palm product prices, but partly mitigated by better downstream earnings (arising from higher sales volume and better margin of differentiated products at the specialty refinery segment).

YTD. 9MFY18 core net profit increased by 13.5% to RM961m as weaker downstream earnings (on the back of falling palm oil prices, which has in turn resulted in slower demand for the bulk business) and lower palm product prices were more than mitigated by higher FFB production.

Potential impact of higher minimum wage. Every RM100/month change in minimum wage in Malaysia will raise its production cost by RM20m a year.

Replanting exercise. As of May-18, SDPlant has completed 85% of its replanting target and is on track to complete its replanting target of circa 23,000 ha for FY18. Moving into FY19, management shared that replanting rate will ease slightly to 4.2- 5.3% of mature planted landbank (from 5-7% in the past).

Ceases further investment in Verdezyne Inc. SDPlant announced that it is ceasing further investment in Verdezyne Inc. (a US-based company which owns proprietary industrial biotechnology platforms, which SDPlant has a 43.6% stake), due to challenging macro-economic conditions and changing business landscape, which have in turn affected the project’s viability. We understand that winding-up process is currently underway. Management shared that it will incur provision of ~RM206m on this investment in 4QFY18.

Forecast. Maintain as the results were inline.

Maintain HOLD, TP: RM5.72. Maintain HOLD rating with unchanged sum-of-parts TP of RM5.72 (see Figure #2).

Source: Hong Leong Investment Bank Research - 1 Jun 2018