1H21 core net profit of RM986m (+291%) beat expectations, accounting for 60.4- 73.1% of our and consensus full-year estimates, due to higher-than-expected realised palm product prices and downstream earnings, as well as lower-than expected finance cost. We raise our FY21-23 core net profit forecasts by 3.4%, 2.8% and 2.6%, respectively, mainly to account for lower finance cost and higher downstream margin assumptions. We are keeping our CPO price assumptions unchanged for now, pending a sector-wide review post results season (with upside bias). Post earnings adjustment, we maintain BUY rating on SDPL, with higher sum-of-parts TP of RM5.17.

Above expectations. 2Q21 core net profit of RM549m (QoQ: +26%; YoY: +322%) took 1H21 sum to RM986 (+291%). The results beat expectations, accounting for 60.4- 73.1% of our and consensus full-year estimates. Key variances against our forecast include higher-than-expected realised palm product prices and downstream earnings, as well as lower-than-expected finance cost.

EIs in 1H21. Core net profit of RM986m in 1H21 was arrived after adjusting for (i) RM44m fair value gains, (ii) RM127m disposal gains, (iii) RM56m net impairment charges, (iv) RM39m unrealised forex losses, (v) RM36m fair value gain on biological assets, (vi) RM4m write-off, and (vii) RM99m gain from retirement benefit plan in Indonesia (as a result of amendments introduced by the Omnibus Law in Indonesia).

Dividend. Declared interim DPS of 7.9 sen (ex-date: 27 Oct 2021), translating to dividend payout ratio of 46.3% of reported EPS in 1H21.

QoQ. Core net profit rose 26% to RM549m in 2Q21, driven mainly by (i) higher FFB output, extraction rate, and realised palm product prices at upstream segment, and (ii) improved downstream earnings (arising from higher earnings contribution from European and African refineries).

YoY. Core net profit more than quadrupled to RM549m in 2Q21 (from RM130m SPLY), boosted mainly by sharply higher palm product prices and higher downstream margins, which more than mitigated lower FFB production and lower downstream sales volume.

YTD. Core net profit surged 291% to RM986m in 1H21, boosted mainly by higher FFB output and realised palm product prices at upstream segment, higher downstream margins and lower finance cost.

No growth in FY21 FFB output. FFB output grew by 2% to 4.66m mt in 1H21, as strong output recovery from Indonesia operations (+19%) more than mitigated lower FFB output contribution from Malaysia (-5%, as a result of labour shortage) and PNG (- 1%). Management now expects FFB output growth to be flattish for the full year, as higher FFB output in Indonesia will be offset by lower FFB output in Malaysia, as a result of labour shortage (which will likely be protracted into the next 6-9 months).

Forecast. We raise our FY21-23 core net profit forecasts by 3.4%, 2.8% and 2.6%, respectively, mainly to account for lower finance cost and higher downstream margin assumptions. We are keeping our CPO price assumptions unchanged for now, pending a sector-wide review post results season (with upside bias). Based on our estimates, every RM100/mt change in our CPO price assumption will result in our FY21-23 core net profit forecasts changing by 8-9%.

Maintain BUY with higher TP of RM5.17. Post earnings adjustment, we maintain BUY rating on SDPL, with higher sum-of-parts TP of RM5.17 (vs. RM5.05 previously).

Source: Hong Leong Investment Bank Research - 19 Aug 2021