SDPlant’s 6M18 core net profit of RM221m (-64.7%) came in below expectations, accounting for only 42.8-55.8% of consensus and our estimates. Lower-than expected realised average CPO price and higher-than-expected CPO production cost were the key variances against our forecast. Key takeaways from the results briefing include (i) FFB output will continue to grow in FY19, (ii) management is hopeful to finalise its decision on Liberia operation in 3-4 months’ time, and (iii) higher fertiliser cost and minimum wage hike in Indonesia will likely drive CPO production cost higher in FY19. We lower our FY19-20 core net profit forecasts by 10.4% and 9.2% mainly to account for higher CPO production cost assumptions. Correspondingly, SOP-derived TP is lowered by 9.4% to RM3.66. Downgrade to SELL given its expensive valuation.

Below expectations. 6M18 core net profit of RM221m (-64.7%) came in below expectations, accounting for only 42.8-55.8% of consensus and our estimates. Lower than-expected realised average CPO price and higher-than-expected CPO production cost were the key variances against our forecast.

QoQ. 2Q Dec 2018 core net profit declined by 36.3% to RM129m, as a sharp improvement in downstream segment’s performance and higher FFB production were more than offset by a 12% decline in realised average CPO price (to RM1,870/mt), higher finance cost (arising from new loan drawdown for the acquisition of Markham Farming Company), and higher tax expense.

YoY. 2Q Dec 2018 core net profit declined by 77.3% to RM129m, as higher FFB production and downstream earnings were more than offset by a 29.5% decline in realised average CPO price and higher finance cost.

YTD. 6M18 core net profit declined by 64.7% to RM221m, as higher FFB production and improved downstream earnings were more than offset by lower realised average CPO price (which declined by 26.1% to RM1,974/mt).

FFB output. FFB output grew by only 1.8% to 5.6m mt in 6M18, as the strong FFB output growth in Indonesia (+19.4%) and PNG (+33.2%) operations were mostly offset by a 13.9% decline in FFB output in Malaysia (as there was bumper harvest during the same period last year). Moving into FY19, management is still guiding for FFB output growth (although the magnitude was not shared), underpinned by higher FFB yield (arising from replanting efforts over the years) and increased field supervision.

No decision on Liberia operation yet. Management shared that it is still reviewing its investment in Liberia, and is hopeful to finalise its decision in 3-4 months’ time. Recall, SDPlant first revealed its intention in exiting its palm and rubber operations in Liberia in 2018, due mainly to the challenging operating environment there.

CPO production cost. SDPlant achieved a blended CPO production cost of circa RM1,600/mt in 6M18. Management hinted that production cost will trend up in FY19, as a result of higher fertiliser prices and minimum wage hike in Indonesia.

Forecast. We lower our FY19-20 core net profit forecasts by 10.4% and 9.2% mainly to account for higher CPO production cost assumptions.

Downgrade to SELL with lower TP of RM3.66. SOP-derived TP lowered by 9.4% to RM3.66 (see Figure 2) following the downward revision in our core net profit forecasts. We downgrade our rating on the stock to SELL (from Hold), as valuation has become expensive following recent share price run-up and our earnings revision. At RM5.10, SDPlant is trading at FY19-20 P/E of 50.2x and 33.6x, respectively.

Source: Hong Leong Investment Bank Research - 1 Mar 2019