1Q22 core net profit of RM741m (QoQ: -6%; oY: +70%) beat expectations, accounting for 28.4-32.3% of consensus and our full-year estimates, due mainly to higher-than-expected realised palm product prices. We raise our FY22-24 core net profit forecasts by 24.0%/ 26.5%/20.2%, mainly to reflect higher CPO price and production cost assumptions, and FFB output assumption in FY22. Post upward revision in our earnings forecasts and recalibration of earnings model, we maintain our BUY rating on SDPL with higher TP of RM6.06.

Beat expectations. 1Q22 core net profit of RM741m (QoQ: -6%; oY: +70%) beat expectations, accounting for 28.4-32.3% of consensus and our full-year estimates, due mainly to higher-than-expected realised palm product prices.

EIs in 1Q22. Core net profit of RM741m in 1Q22 was arrived after adjusting for (i) RM73m fair value changes on biological assets, (ii) RM64m fair value losses, (iii) RM55m disposal gains, (iv) RM71m unrealised forex losses, and (v) RM16m write-off on PPE and inventories.

QoQ. 1Q22 core net profit declined by 6% to RM741m, as higher realised palm product prices were negated by seasonally lower FFB production (-10%) and weaker downstream performance (resulted from lower sales volumes across all regions and margin pressure from escalating energy costs in Europe, albeit partly mitigated by improved margins in Asia Pacific operations).

YoY. 1Q22 core net profit surged by 70% to RM741m, boosted mainly by sharply higher realised palm product prices and better performance at downstream segment, but partly weighed down by a 13% decline in FFB output.

FFB output guidance. FFB output fell by 13% to 1.91m tonnes in 1Q22, dragged mainly by (i) prolonged acute labour shortage in Malaysia (which has resulted in a 16% decline in its output in Malaysia) and (ii) normalisation of cropping pattern in Indonesia estates. Management shared that the gradual arrival of foreign labour (starting from Jun-22) will narrow the FFB output decline for FY22 to ~5%.

Impact on minimum wage. Management shared that minimum wage hike will result in its operating expenses in Malaysia rising by RM80-90m/annum (which in turn translates to RM35-40/tonne increase in its CPO production cost in Malaysia, based on our estimates.

On ESG matters. We understand that audit findings by Impactt will be published upon being reviewed by US CBP.

Forecast. We raise our FY22-24 core net profit forecasts by 24.0%, 26.5% and 20.2%, respectively, mainly to account for (i) higher CPO price assumptions (RM5,500/4,500/4,500 per tonne in FY22-24 following our recent upward revision in CPO price assumptions for the sector), (ii) higher CPO production cost assumptions at upstream segment, and (iii) lower FFB output assumption in FY22.

Maintain BUY with higher TP of RM6.06. Post upward revision in our earnings forecasts and recalibration of earnings model, we maintain our BUY rating on SDPL with higher TP of RM6.06 (from RM5.95 earlier), based on 20x FY23 core EPS of 30.3 sen. SDPL remains one of our top picks for the sector, due to its high operating leverage to CPO price. Besides, its proactive measures to tackle US CBP’s ban issues will likely pave the way to alleviate ESG concerns.

Source: Hong Leong Investment Bank Research - 23 May 2022