SDPlant’s 1QFY19 core net profit of RM108m (QoQ: -55.2%; YoY: -56.3%) came in below expectations, accounting for only 7.8-8.9% of our and consensus fullyear forecasts, due mainly to lower-than-expected realised average CPO price and lower-than-expected downstream earnings. During the briefing, management shared that (i) downstream performance will improve in 2QFY19, (ii) inventory will start easing in 2QFY19, and (iii) minimum wage hike will impact its Malaysian estate cost by RM7.8m per annum. We lower our FY19-20 net profit forecasts by 27% and 7.1% to reflect lower palm product prices realised YTD and higher production cost assumption. SOP-derived TP lowered by 12.1% to RM5.03 as we (ii) lower our FY19-20 core net profit forecasts and (ii) roll forward our valuation base year (from FY06/19 to CY19. Maintain HOLD rating.

Below expectations. 1QFY19 core net profit of RM108m (QoQ: -55.2%; YoY: - 56.3%) came in below expectations, accounting for only 7.8-8.9% of our and consensus full-year forecasts, due mainly to lower-than-expected realised average CPO price and lower-than-expected downstream earnings.

QoQ. 1QFY19 core net profit declined by 55.2% to RM108m, as higher FFB production (+12.9%) was more than offset by weaker downstream earnings (arising from lower differentiated product sales volume and margin), lower realised average CPO price and higher finance costs (arising from increased borrowings).

YoY. 1QFY19 core net profit declined by 55.2% to RM108m, mainly on lower realised average CPO price and weaker downstream earnings (arising from lower margin at differentiated product sub-segment) but partly mitigated by a 2.1% increase in FFB production and lower finance costs.

Downstream performance to improve. PBIT at downstream division eased to RM48m in 1QFY19 (from RM68m in 4QFY18), due mainly to increased competition and seasonally lower demand, which have in turn resulted in lower sales volume and margins at the differentiated product sub-segment. Management expects performance at the downstream division to improve in coming quarter, as raw material prices have started showing signs of stabilisation and this should result in better margins.

Inventory to ease by 2QFY19. Inventory went up by 26.2% QoQ to RM1.98bn, boosted by (i) 166% and 74% increase in CPO and PK inventories (in terms of tonnage), and (ii) a 35% increase in refined products. Management shared that the inventory level has started easing gradually since Nov-18 as palm product prices have started showing signs of stabilising and palm production have started easing.

Impact on minimum wage hike. The Federal Government’s recent move to raise minimum wage will result in SD Plant’s Malaysian estate cost increasing by RM7-8m p.a..

Forecast. We lower FY19-20 core net profit forecasts by 27% and 7.1%, largely to account for lower palm product prices realised YTD, and (iii) higher production cost assumptions in Malaysian and Indonesian estates arising from recent minimum wage hike in Malaysia and higher fertiliser cost in Malaysia.

Maintain HOLD with lower TP of RM5.03. SOP-derived TP lowered by 12.1% to RM5.03 as we (ii) lower our FY19-20 core net profit forecasts and (ii) roll forward our valuation base year (from FY06/19 to CY19. Maintain HOLD rating.

Source: Hong Leong Investment Bank Research - 26 Nov 2018