1H22 core net profit of RM1.34bn (+36%) missed expectations, accounting for only 44.9-47.0% of consensus and our full-year estimates, due mainly to weaker than-expected FFB output. Declared interim DPS of 10 sen. We cut our FY22 core net profit forecast by 16.1%, mainly to account for lower FFB output assumption in Malaysia, but partly mitigated by higher margin assumption for downstream segment. Core net profit forecasts for FY23-24, on the other hand, remain unchanged. Maintain our HOLD rating on SDPL, with an unchanged TP of RM4.23, based on unchanged 20x FY24 core EPS of 21.2 sen.

Missed expectations. 2Q22 core net profit of RM596m (-20% QoQ; +9% YoY) took 1H22 total sum to RM1,34bn (+36% YoY). The results missed expectations, accounting for only 44.9-47.0% of consensus and our full-year estimates, due mainly to weaker-than-expected FFB output (particularly, FFB output in Malaysia operations).

EIs in 1H22. Core net profit of RM1.34bn in 1H22 was arrived after adjusting for (i) RM287m gain on disposals, (ii) RM38m unrealised forex loss, (iii) RM20m fair value loss on biological assets, (iv) RM100m write offs on property plant and equipment and inventories.

Dividend. Declared interim DPS of 10 sen (vs. 7.9 sen in 2Q21), going ex on 3 Nov 2022.

QoQ. Core net profit fell by 20% to RM596m in 2Q22, dragged mainly by lower contribution from upstream plantation segment (arising from lower average PK realised price and OER, but partly mitigated by higher FFB output and average CPO realised price). Contribution from downstream segment, on the other hand, improved significantly, helped by higher sales volumes from all regions and higher margins from Asia Pacific operations.

YoY. Core net profit rose by 9% to RM596m in 2Q22, as higher contribution from downstream segment more than mitigated weaker contribution from upstream segment (which was weighed down by lower FFB output and OER, but partly mitigated by higher realised palm product prices).

YTD. Core net profit rose by 36% to RM1.34bn in 1H22, boosted mainly by higher realised palm product prices and better showing at downstream segment (driven by higher profits across all operating regions), but partly moderated by a 15% decline in FFB output and lower OER.

FFB output guidance. FFB output fell by 15% to 4m tonnes in 1H22, dragged by (i) acute labour shortfall in Malaysia (which has in turn resulted in FFB output in Malaysia falling by 25% to 1.75m tonnes), and (ii) lower FFB production in Indonesia (particularly, during 1Q22, due to normalisation of cropping pattern). Moving into 2H22, management expects the output drag in Malaysia to be partly mitigated by output growth in Indonesia and PNG, hence narrowing the group’s FFB output decline to <10%.

Forecast. We cut our FY22 core net profit forecast by 16.1% to RM2.39bn, mainly to account for lower FFB output assumption in Malaysia, but partly mitigated by higher margin assumption for downstream segment. Core net profit forecasts for FY23-24, on the other hand, remain unchanged, as we expect FFB output in Malaysia to improve from FY23 (in anticipation of foreign labour arrival by end-FY22).

Maintain HOLD with unchanged TP of RM4.23. We maintain our HOLD rating on SDPL, with an unchanged TP of RM4.23, based on unchanged 20x FY24 core EPS of 21.2 sen.

Source: Hong Leong Investment Bank Research - 24 Aug 2022