We recently organised a 1-day visit to SD Plantation’s estates under PT Aneka Intipersada in Pekanbaru to see and learn about the condition and development of the Indonesian operation. The weighted average age of SD Plantation’s palm trees in Indonesia is c.14 years, slightly older than the group average of c.13 years. Hence, some estates in Indonesia have started their replanting programme at a faster rate. This, together with certain areas in Kalimantan having not fully recovered from El Nino, has caused its 1HFY18 FFB production in Indonesia to be lower by 5% yoy. Maintain HOLD on SD Plantation with an unchanged 12-month TP of RM5.35.

Older Palm Trees in Indonesia

The weighted average age of the palm trees in Indonesia is c.14 years, slightly older than the group average of c.13 years. In particular, at the PT Aneka Intipersada estates that we visited, the palm trees at about 46% of the total planted area of 9,656 ha are aged between 19-25 years. Hence, these estates have started to replant at a higher rate of 4-7% of the total planted area p.a., to be in line with group’s target to reduce its average palm tree age to c.10 years by FY2025.

More R&D to Improve Indonesia’s Production

For 1HFY18, SD Plantation’s Indonesia FFB yield was flat yoy at 8.91 MT/ha, lower than the 12.8 MT/ha in Malaysia and 9.76 MT/ha in Papua New Guinea (PNG). Indonesia’s 1HFY18 FFB production was down by 5% yoy to 1.44m MT, partly attributable to smaller prime matured areas due to the aggressive replanting programme as well as certain estates in Kalimantan area not having fully recovered from the 2015-16 El Nino phenomenon. The selection of high quality planting materials, stringent culling process and adoption of best estate management practices could potentially help improve the Indonesian production going forward.

Over Reliance on Labour in Indonesia

There is no problem getting labour in Indonesia, but the rising minimum wage is a concern. As such, more mechanization needs to be put in place at the Indonesian operation. Failure to do so could lead to a higher cost of production in Indonesia.

Maintain Our HOLD Recommendation, TP of RM5.35

We make no changes to our FY18-20E core EPS and 12-month target price of RM5.35, which is based on an unchanged 25x CY18E core EPS. We maintain our HOLD rating on the stock.

Source: Affin Hwang Research - 23 Apr 2018