We deem 9M21 core net profit of RM1,673m (+212%) (accounting for 71.8-80.9% of our and consensus full-year estimates) within our expectation, as we anticipate earnings to improve further in 4Q, on the back of higher palm product prices. We raise our FY21-23 core net profit forecasts by 6.8%, 36.1% and 5.9% respectively, mainly to reflect higher CPO price and fertiliser cost assumptions. We note that our FY21-23 CPO price assumptions are now RM4,250/mt, RM3,500/mt and RM2,900/mt. Following the upward revision in our core net profit forecasts and roll-forward of valuation base year (from FY22 to FY23), we maintain our BUY rating on SDPL with a higher sum-of-parts TP of RM5.03 (from RM4.99 previously).

Inline. 3Q21 core net profit of RM687m (QoQ: +25%; YoY: +242%) took 9M21 sum to RM1,673m (+212%), accounting for 71.8-80.9% of our and consensus full-year estimates. We consider the results within our expectation, as we anticipate earnings to improve further in 4Q, on the back of higher palm product prices.

EIs in 9M21. Core net profit of RM1,673m in 9M21 was arrived after adjusted for (i) RM14m fair value losses, (ii) RM166m disposal gains, (iii) RM64m impairment, (iv) RM50m unrealised losses, (v) RM53m fair value gain on biological assets, (vi) RM22m write-offs, (vii) RM55m impairment on discontinued operations, and (viii) RM102m gain from retirement benefit plan in Indonesia (as a result of amendments introduced by the Omnibus Law in Indonesia).

QoQ. Core net profit rose 25% to RM687m in 3Q21, due mainly to higher contribution from upstream segment (arising from higher realised CPO prices, which more than compensated lower FFB output, OER and realised PK prices), this more than mitigated weaker downstream showing (as a result of weaker Asia Pacific bulk operations and losses at European refineries).

YoY. Core net profit more than doubled to RM687m in 3Q21 (from RM284m SPLY), boosted mainly by higher upstream earnings (as the 2% decline in FFB output was more than mitigated by higher realised palm product prices and OER). Performance at downstream segment, on the other hand, weakened from a year ago, dragged mainly by lower earnings generated by the Asia Pacific operations (which in turn arose mainly from timing difference) and margin compression at differentiated sub-segment.

YTD. Core more than doubled to RM1,673m in 9M21 (from RM536m SPLY), boosted mainly by (i) significantly higher palm product prices and higher OER at upstream segment, (ii) improved performance at downstream segment during 1H21, and (iii) significantly lower finance cost (as a result of lower benchmark lending rates and borrowing levels).

FFB output guidance. FFB output grew marginally (by 0.3%) to 7m mt in 9M21, as output recovery from Indonesia operations (+16%) and PNG (+1%) more than mitigated lower FFB output contribution from Malaysia estates (-7%, as a result of labour shortage). Management is keeping its flattish FFB output growth guidance in FY21, higher FFB output in Indonesia will be offset by lower FFB output in Malaysia, as a result of labour shortage. Management is hopeful that a gradual return of foreign labour (starting by late Dec-21/early Jan-22) will lift group FFB output marginally in FY22.

CPO production cost guidance. SDPL registered a blended CPO production cost of RM1,780/mt in 9M21, and such cost will likely remain unchanged for the remaining months of FY21. Moving into FY22, management shared that it has secured most of its fertiliser requirement at much higher prices than previous years, and this will lift its CPO production cost by ~RM200/mt to RM2,000/mt (based on our estimates).

Impact of new taxes in FY22. Between the proposed Cukai Makmur and tax on foreigned-sourced income in Budget 2022, the latter will have a bigger impact on SDPL, as its operations in Indonesia and Papua New Guinea are contributing significantly to the group. The additional tax from the proposed Cukai Makmur (which is taxed on the subsidiaries’ level) will have lesser impact given its view of a lower palm oil price in FY22.

Forecast. We raise our FY21-23 core net profit forecasts by 6.8%, 36.1% and 5.9% respectively, mainly to reflect higher CPO price but partially offset by fertiliser cost assumptions. We note that our FY21-23 CPO price assumptions are now RM4,250/mt, RM3,500/mt and RM2,900/mt (vs. RM3,800/mt for FY21 and RM2,900/mt for FY22-23 previously).

Maintain BUY, with slightly higher TP of RM5.03. Following the upward revision in our core net profit forecasts and roll-forward of valuation base year (from FY22 to FY23), we maintain our BUY rating on SDPL with a higher sum-of-parts TP of RM5.03 (from RM4.99 previously).

Source: Hong Leong Investment Bank Research - 19 Nov 2021