2Q20 core net profit of RM132m (QoQ: +37.5%; YoY: >100%) took 1H20 core net profit to RM228m (>100%), accounting for 39.1-44.8% of consensus and out full year estimates. We deem the results within our expectation, as we anticipate 2H to come in stronger. Declared DPS of 4.02 sen (consisting 1.45 sen special interim DPS and 2.57 sen interim DPS), which will be going ex on 16 Nov 2020. Maintain core net profit forecasts, SOP-derived TP of RM4.63 and HOLD rating on the stock.

Within our expectation. 2Q20 core net profit of RM132m (QoQ: +37.5%; YoY: >100%) took 1H20 core net profit to RM228m (>100%), accounting for 39.1-44.8% of consensus and our full-year estimates. We deem the results within our expectation, as we anticipate 2H to come in stronger on the back of seasonally higher FFB output and downstream performance.

Exceptional items (EIs). Our core net profit of RM132m was derived after adjusting for (i) RM130m disposal gains, (ii) RM53m unrealised forex gain, (iii) RM15m fair value gain, (iv) RM6m PPE written off, (v) RM6m impairment on trade receivables, and (vi) RM14m impairment on inventories.

Dividend. Declared DPS of 4.02 sen (consisting 1.45 sen special interim DPS and 2.57 sen interim DPS), which will be going ex on 16 Nov 2020.

QoQ. Core net profit surged 37.5% to RM132m in 2Q20 (from RM96m in 1Q20), helped by higher FFB production (+17%), lower CPO production cost (as certain activities were not carried out due to movement restrictions imposed by governments to contain Covid - 19 pandemic), and improved downstream performance.

YoY. Core net profit jumped to more than 9x to RM132m (from RM13m SPLY), boosted by a 3% increase in FFB production, higher palm product prices (+17%), and lower CPO production cost (due to the same reason mentioned above), which more than mitigated weaker contribution from downstream segment (arising from Covid-19 pandemic, which has in turn affected demand for Sime Plant’s downstream products).

YTD. 1H20 core net profit jumped by more than 9x to RM228m, as lower FFB production (-7%) and weaker contribution from downstream segment were more than mitigated by higher palm product prices and OER, and lower CPO production cost.

FFB production guidance lowered. FFB production fell 7.3% to 4.95m mt in 1H20, dragged mainly by labour shortage in Malaysia and lagged impact prolonged drought season in South Kalimantan. Despite having anticipated FFB production to pick up in 2H20 (on the back of seasonal factor), management shared that FFB production will likely come flat (relative to 2019), due to worsening labour shortage in Malaysia.

Downstream. In 1H20, downstream segment was affected by narrower refining margins and lower demand for differentiated products in 2Q (as a result of Covid-19 pandemic). While margins at the downstream segment remain uncertain at this juncture, management expects demand for downstream products to recover from 2H20.

Forecast. Maintain, as results were within our expectation. In our forecasts, we are assuming average CPO prices of RM2,370/mt for 2020 and RM2,420/mt for 2021-2022.

Maintain HOLD; TP: RM4.63. We maintain our SOP-derived TP of RM4.63 (see Figure #2) and HOLD rating on the stock.

Source: Hong Leong Investment Bank Research - 28 Aug 2020