SD Plantation reported lower 3M18 revenue due to lower contributions from its upstream and downstream plantation operations. After excluding one-off items, the group’s core net profit plunged by 62.3% yoy to RM113m. This was below our expectation mainly due to lower CPO and PK prices as well as higher operating costs. As such, we cut our 6M18-2020E core EPS estimates for SD Plantation by 29-47%. Given our earnings forecast revisions and despite a higher target PER of 35x (based on SD Plantation’s 1-year mean after taking into account SD Plantation’s size, status and liquidity) applied to our 2019E core EPS, we lower our 12-month TP to RM4.96 from RM5.08. We maintain our HOLD rating on the stock.

3M18 Core Net Profit Declined by 62.3% Yoy to RM113m

SD Plantation’s 3M18 revenue declined by 14.2% yoy to RM3.04bn. This was mainly due to declines in both the upstream and downstream plantation segments, which fell by 10.5% and 15.4% yoy, respectively, to RM700m and RM2.3bn. SD Plantation’s PBT for 3M18 declined 82.9% yoy to RM212m, partly due to an inclusion of gain on disposals of assets of about RM676m in the prior-year corresponding period as well as lower ASPs for CPO and PK, while FFB production increased by 2% yoy to 2.75m MT. SD Plantation’s 3M18 CPO ASP was lower at RM2,117/MT (1QFY06/18: RM2,693/MT) while PK ASP was lower at RM1,649/MT (1QFY06/18: RM2,109/MT). After excluding for one-off items, 3M18 core net profit plunged by 62.3% yoy to RM113m. This accounted for 20.3% of our previous 6M18 forecast and is below our expectations, mainly due to lower CPO and PK prices as well as higher operating costs.

Weaker Sequentially Due to Lower Prices

Sequentially, SD Plantation’s 3M18 revenue declined slightly by 1.5% qoq to RM3.04bn. 3M18 core PBT declined by 42% qoq to RM210m, mainly attributable to lower CPO prices and higher operating costs. The 3M18 CPO ASP was lower at RM2,117/MT vs. RM2,379/MT in the prior quarter, while FFB production in 3M18 rebounded qoq by 13% to 2.75m MT. SD Plantation’s core net profit (after excluding one-off items) declined by 53.1% qoq to RM113m.

Maintain HOLD rating with a new TP of RM4.96

Due to weak CPO prices as well as our higher production cost assumptions mainly because of the increase in minimum wages in Malaysia, we have cut our 6M18-2020E core EPS estimates for SD Plantation by 29-47%. Given the earnings forecast revisions and despite a higher target PER of 35x (based on SD Plantation’s 1-year mean after taking into account SD Plantation’s size, status and liquidity; previously 25x based on a 15% premium to the sector’s earlier 2019E average PER of 22x) applied to our 2019E core EPS, we lower our 12-month TP to RM4.96. We maintain our HOLD rating on the stock.

Key Risks

Key upside/downside risks include: 1) a stronger/weaker economic growth leading to a higher/lower consumption of vegetable oils; 2) a sustained rebound/plunge in the CPO price; 3) higher/lower-than-expected FFB and CPO production; and 4) changes in policies.

Source: Affin Hwang Research - 26 Nov 2018