SDPlant’s 3Q19 core net profit of RM57m (QoQ: >100%; YoY: -57.8%) took 9M19 core net profit to RM67m (-90.6%). The results beat our estimate, accounting for 93.3% of our full-year estimate, mainly due to better-than-expected performance at Indonesian operations. We raise our FY19 core net profit forecast by 107.8%, 2.3% and 2.2%, mainly to account for lower production cost assumption at Indonesia upstream plantation operation. We raise our TP on SDPlant by 4.8% to RM5.07, to reflect (i) the upward revision in our core net profit forecasts, and (ii) the roll-forward of our valuation base year for the upstream plantation segment to FY21 (from FY20 previously). Maintain HOLD rating, as we believe further upside is capped by its rich valuations.

Above our expectation. 3Q19 core net profit of RM57m (QoQ: >100%; YoY: -57.8%) took 9M19 core net profit to RM67m (-90.6%). The results beat our estimate, accounting for 93.3% of our full-year estimate, mainly due to better-than-expected performance at Indonesian operations.

EIs in 3Q19. During the quarter, SDPlant incurred total EIs of RM284m, largely related to (i) RM256m impairment on Liberia operations, (ii) RM8m impairment on MyBiomass, (iii) RM25m impairment on a loan to a JV, and (iv) RM19m impairment of assets in Indonesia.

QoQ. 3Q19 core net profit grew more than 3x to RM57m (from RM13m in 2Q19), as widened losses at PNG operations and higher finance cost were more than mitigated by a sharp improvement in Malaysia and Indonesia operations, as well as higher downstream segment earnings. Despite lower FFB output and realised average CPO price, PBIT at Malaysia upstream plantation segment, as lower FFB output and realised average CPO price were more than mitigated by higher CPO sales volume (+7%), higher OER (which increased by 0.62%-pts to 21.6%) and lower operating costs. On the other hand, widened losses at PNG’s upstream plantation segment were due mainly to lower FFB production (-16%) and realised average CPO price, but partly mitigated by improved sugar contribution

YoY. 3Q19 core net profit plunged 57.8% to RM57m, dragged mainly by sharply lower upstream plantation earnings (arising from lower FFB output and realised average CPO price) and pest issue in PNG’s sugar plantation, but partly mitigated by improved downstream earnings.

YTD. 9M19 core net profit plunged 90.6% to RM67m, as improved downstream earnings were more than offset by significantly lower upstream plantation earnings (arising mainly from lower realised average CPO price) and sugar contribution.

Forecasts. We raise our FY19 core net profit forecast by 107.8%, 2.3% and 2.2% to RM149m, RM859m and RM884m, respectively, mainly to account for lower production cost assumption at Indonesia upstream plantation operation.

Maintain HOLD with higher TP of RM5.07. We raise our TP on SDPlant by 4.8% to RM5.07, to reflect (i) the upward revision in our core net profit forecasts, and (ii) the roll-forward of our valuation base year for the upstream plantation segment to FY21 (from FY20 previously). While we expect a significant improvement in SDPlant’s earnings performance from 4Q19 onwards, we see limited upside from current share price level, given its pricey valuations. At RM4.98, SDPlant is trading at FY20-21 P/E of 39.4x and 38.3x, respectively. Hence, we are maintaining our HOLD rating on the stock.

Source: Hong Leong Investment Bank Research - 2 Dec 2019