SDPlant’s core net loss of RM35m brought 1H19 core net loss to RM22m (vs. core net profit of RM626m in 1H18). The results missed expectations, against HLIB and consensus full-year core net profit estimates of RM101.4-536.4m, due mainly to higher-than-expected losses at PNG operations. During the briefing, management shared that it will finalise its decision on its Liberian operations in the next 2 months, and the worst case scenario will result in SDPlant writing off the remaining US$55m book value in Liberia. We cut our FY19 core net profit forecast by 29.2% to RM71.8m to account for higher loss assumption at PNG operations. Maintain SELL rating with unchanged TP of RM3.56.

Weaker-than-expected. 2Q19 core net loss of RM35m (vs. core net profits of RM13m in 1Q19 and RM241m in 2Q18) brought 1H19 core net loss to RM22m (vs. core net profit of RM626m in 1H18). The results missed expectations, against HLIB and consensus full-year core net profit estimates of RM101.4-536.4m, due mainly to higher-than-expected losses at PNG operations.

QoQ. 2Q19 performance reversed to a core net loss of RM35m (from a core net profit of RM13m in 1Q19) due mainly to lower average PK realised price (-15%), seasonally lower FFB production (-3.6%) and weaker downstream contribution (arising from lower sales volumes and higher feedstock costs for both bulk and differentiated sub segments). During the quarter, operating loss at PNG operations widened to RM76m (from RM19m in 1Q19), due mainly to lower fair value of biological assets in sugar cane segment (which has in turn resulted in a RM41m charge), lower FFB production and higher production cost at the plantation segment.

YoY. 2Q19 performance reversed to a core net loss of RM35m (from a core net profit of RM241m in 2Q18) due mainly due sharply lower average CPO and PK prices realised, lower palm product sales volumes, and weaker downstream earnings (arising mainly from weaker contribution from the differentiated businesses in Asia Pacific, Middle East and Africa amidst competitive market environment).

YTD. 1H19 performance reversed to a core net loss of RM22m (from a core net profit of RM626m in 1H18), as the 3.7% increase in FFB output and slight improvement in downstream earnings were more than offset by the plunge in average CPO and PK prices realised (which declined by 16% and 41% respectively).

FFB production. FFB production grew 3.7% to 4.95m tonnes in 1H19, contributed mainly by a 5.1% growth in FFB production from Malaysian estates (while production in Indonesia and PNG estates grew by 1.1% and 2.5%). We believe the growth momentum in FFB output will sustain into 2H19, underpinned by more areas moving into mature bracket in Malaysian operations, and crop recovery in Indonesian estates.

Liberia. Management shared that it will finalise its decision on its Liberian operations in the next 2 months. We understand that SDPlant is current in talks with several parties, and it will hand over the assets to the Liberian government should the talks fall through. In the worst case scenario, SD Plant will have to write off the remaining book value in Liberia, which amounts to US$55m.

Forecasts. We cut our FY19 core net profit forecast by 29.2% to RM71.8m to account for higher loss assumption at PNG operations. We leave our FY20-21 core net profit forecasts unchanged.

Maintain SELL with unchanged TP of RM3.56. We maintain our SELL rating on SDPlant, with unchanged TP of RM3.56 (see Figure 2) based on 2x P/B, at implied enterprise value of RM55k per hectare (planted).

Source: Hong Leong Investment Bank Research - 3 Sept 2019