SD Plantation reported lower 2019 revenue due to lower contribution from its upstream and downstream plantation operations. The group posted a lower core net profit (excluding discontinued operations) of RM350m due mainly to weaker CPO production and prices. We have adjusted our 2020-21E core EPS to exclude its Liberian operations. We expect better earnings in 2020E on the back of improving CPO prices and production. Given the downward earnings revision, we lower our DCF-derived 12-month target price to RM4.95, and maintain our HOLD rating on the stock.

Weaker Revenue Due to Lower FFB Production and CPO Prices

SD Plantation’s 2019 revenue declined by 8.9% yoy to RM12.06bn, due to a decline in contribution from both the upstream and downstream segments. Its 2019 PBT plunged 78.4% yoy to RM251m, due to lower contribution from its upstream plantation (lower profits from the upstream Malaysia operation while losses were seen at the upstream plantation in PNG/SI) and downstream segments. The weak performance from the upstream plantation segment was mainly due to the lower CPO ASP of RM2,063/MT (2018: RM2,185/MT) and a decline in FFB production by 6.5% yoy to 9.6m MT. On the other hand, the downstream plantation segment’s profit declined yoy due to lower contribution from the Europe, Middle East and Africa sub-segments.

2019 Core Net Profit of RM350m, Down 60.8% Yoy

Excluding one-off items, 2019 core net profit for continuing operations was at RM350m, down 60.8% yoy. If we include the discontinued operations, the core net profit would be lower by 95.9% yoy to RM28m, mainly due to losses from the discontinued Liberia operation (which includes impairment charges on assets of Upstream Liberia of RM236m).

Higher Core Net Profit in 4Q19 of RM176m

SD Plantation’s 4Q19 revenue increased by 19.7% qoq to RM3.4bn, but its PBT was down 61.9% qoq to RM32m. The reduction in PBT was partly attributable to the fair value loss from commodity futures as well as lower FFB production, but this was partially offset by higher CPO prices. Nevertheless, excluding one-off items, SD Plantation’s core net profit (excluding discontinued operation) increased >100% qoq to RM176m; if the discontinued operations were included, the group would have reported a core net profit of RM163m in 4Q19 vs. a core net loss of RM198m in 3Q19 (3Q19 includes impairments for the Liberian operation). Update on potential asset monetisation exercise To recap, SD Plantation plans to carry out an asset monetisation exercise and targets to raise approximately RM1-1.3bn. The money raised could potentially be used to lower down its borrowing costs, for future investments or/and for dividends. The company has completed its disposal of PT Mitra Austral Sejahtera (PT MAS) and some land sales, totalling about RM114m, coupled with the divestment of its Liberian operation. Other than this, it plans to dispose some of its non-core and non-strategic assets, non-profitable assets, low yielding assets as well as land in Malaysia that has been identified for property development and government infrastructure projects, totalling >RM1bn.

Maintain HOLD Rating With Lower TP of RM4.95

We have lowered our 2020-21 core EPS forecasts by 4-5% to exclude the Liberia operations. We expect 2020-21E to be better years for SD Plantation, mainly on the back of improving CPO prices to RM2,500- 2,600/MT. We also introduce our 2022 forecasts. Given our earnings forecast revisions, our DCF-derived target price has been lowered to RM4.95, and we maintain our HOLD rating.

Key Risks

Key upside/downside risks include: 1) 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 - 2 Mar 2020