SD Plantation is one of the most well-established and integrated plantation companies in Malaysia. Like most plantation companies in the region, we expect its FFB production to increase as its palm trees recover from the 2015-16 El Nino effects. However, we believe EPS growth will be mediocre despite rising FFB yields/OER on the back of weak ASPs. Moreover, we believe the stock is already accorded a PE premium taking into account its size, status and trading liquidity. In view of this, we initiate coverage on SD Plantation with a HOLD rating and 12-month TP of RM 5.35, based on 25x 2018E core EPS.

An Integrated Company

SD Plantation is principally involved in the whole palm oil supply chain including the management of oil palm plantations, cultivation of oil palms, harvesting of FFB and production of CPO, PK and refined palm oil products. It operates and manages 251 estates and 72 palm oil mills located in Malaysia, Indonesia, PNG, the Solomon Islands and Liberia.

Earnings Driven by Recovery in FFB and CPO Production

Despite a lower CPO ASP forecast over FY18E-20E (FY18: RM2,700/MT, FY19: RM2,600/MT and FY20E RM2,550/MT) from RM2,848/MT currently, we expect SD Plantation’s FY18-20E revenue to increase by about 3% yoy each and core net profit to increase by 4-14% yoy, underpinned by higher revenue contribution from both upstream and downstream divisions. We expect FFB production to increase by 2-6% yoy from 9.78m MT in FY17, as FFB yield improves.

Limited Near Term Upside From Long-term Growth Strategies

Management is targeting to achieve FFB yields of 25 MT/ha and OER of 25% by 2025, higher downstream PBT contribution of 20% within the next 5 years, average palm tree age profile of about 10 years and integrated economics across the value chains. Based on our sensitivity analysis, a RM100/MT-RM300/MT movement in CPO prices could potentially affect core EPS by 6-18% for FY18-20E. A change in FFB yield by 0.25MT/ha- 1.0MT/ha could potentially affect core EPS by 1-3%, while change in OER by 0.25-1.0% could potentially affect core EPS by 1-3%.

Initiate Coverage With a HOLD Recommendation, TP of RM5.35

We initiate coverage on SD Plantation with a HOLD recommendation and a 12-month TP of RM5.35, based on 25x CY18E core EPS, which is derived by assigning a 10% premium to the market cap weighted average PER multiple of the plantation sector. We believe that share price is fairly valued at current level against the reference-listing price of RM5.59.

Source: Affin Hwang Research - 29 Nov 2017