SDPlant’s 1Q19 core net profit of RM13m (-84.9% QoQ, -96.1% YoY) missed expectations, accounting for only 1.3-1.8% of consensus and our full-year forecasts. Lower-than-expected realised CPO price and higher-than-expected net finance cost were the key variances against our forecast. SDPLant targets to raise circa RM1bn from its asset monetisation exercise, which the proceeds will be used to (i) pare down borrowings, (ii) acquire downstream assets (over the longer term), and (iii) pay out dividend. We slashed our FY19-20 core net profit forecast by 82.9% and 5.1% to RM123.9m, mainly to account for lower palm product prices realised in 1Q19 and higher finance cost assumptions. We maintain our SELL rating with a lower SOP-derived TP of RM3.43.

Below expectations. 1Q19 core net profit of RM13m (-84.9% QoQ, -96.1% YoY) missed expectations, accounting for only 1.3-1.8% of consensus and our full-year forecasts. Lower-than-expected realised CPO price and higher-than-expected net finance cost were the key variances against our forecast.

QoQ. 1Q19 core net profit plunged 84.9% to RM13m, dragged mainly by lower FFB production and PK prices, coupled with weaker downstream earnings, but partly offset by a recovery in CPO prices.

YoY. 1Q19 core net profit plunged 96.1% to RM13m, as higher FFB production (14%, which in turn was driven mainly by higher FFB output contribution from Indonesia and PNG), an 8% reduction in cost to customers, and improved downstream earnings were more than offset by sharply lower palm prices and higher net finance cost (arising from new loan drawdown for the acquisition of Markham Farming Company).

Asset monetisation exercise. SDPlant is targeting to raise circa RM1bn from its asset monetisation exercise. The group has already carried out tender exercise in Mar-19 on 15 parcels of land identified with potential for property development and/or government infrastructure projects. We understand that proceeds from the exercise will be used to (i) pare down borrowings (as at 31 Mar 2019, SDPlant has net debt ad net gearing of RM7bn and 0.43x respectively), (ii) acquire downstream assets (over the longer term), and (iii) pay out dividend.

Forecast. We slashed our FY19-20 core net profit forecast by 82.9% and 5.1% to RM123.9m, mainly to account for lower palm product prices realised in 1Q19 and higher finance cost assumptions. We will be reviewing our palm oil price assumptions for FY20-21 further post reporting season, which will most likely result in a sector wide reduction in our core net profit forecasts for all plantation companies under our coverage.

Maintain SELL with lower TP of RM3.43. We maintain our SELL rating with a lower SOP-derived TP of RM3.43 (see Figure #2).

Source: Hong Leong Investment Bank Research - 3 Jun 2019