SD Plantation’s 1Q20 core net profit (excluding discontinued operations) of RM48m, came in below our expectations. We have adjusted our 2020E core EPS lower by 9.2% to account for lower contribution from its upstream division. We expect the subsequent quarters to be more unpredictable due to the Covid-19 situation and volatile crude oil prices. Given our earnings revisions, and rolling forward our valuation horizon, we lift our DCF-derived target price to RM3.90 (from RM3.50). Maintain our SELL rating as we remain cautious on the plantation sector’s outlook.

1Q20 Core Net Profit at RM48m, Below Our Expectation

SD Plantation’s 1Q20 revenue increased slightly by 1.5% yoy to RM3.04bn, due to higher contribution from the downstream segment but partially offset by lower revenue from its upstream segment. For 1Q20, SD Plantation’s CPO and PK ASPs were higher by 29.4% and 26.2% yoy at RM2,605/MT (1Q19: RM2,012/MT) and RM1,519/MT (1Q19: RM1,204/MT) respectively, although FFB production declined by 16% yoy to 2.1m MT (production was lower throughout SD Plantation’s estates in Malaysia, Indonesia and PNG/SI which was partly attributable to the lagged effect of adverse weather conditions back in 2019). SD Plantation’s 1Q20 PBT, which includes forex loss, fair value gains on commodities and gains on land disposal in Malaysia, surged >100% yoy to RM607m. After excluding for one-off items, 1Q20 core net profit for continuing operations was at RM48m, down 22.6% yoy.

Sequentially Weaker Core Net Profit

Sequentially, SD Plantation’s revenue declined by 9.8% qoq to RM3.04bn in 1Q20, but it reported a higher PBT of RM607m, up >100% qoq. The surge in PBT was mainly attributable to fair value gains from commodity futures and gains on land disposal. However, after excluding these one-off items, SD Plantation’s core net profit (excluding discontinued operation) dropped by 72.7% qoq to RM48m.

Source: Affin Hwang Research - 27 May 2020