• SD Plantation’s 6M20 core net profit of RM156 (>100% yoy) came in below our expectations. The variance was mainly due to lower-than-expected contribution from the downstream segment.
• We cut our 2020E core earnings forecast by 11.7% to take into account lower profits from the downstream business, while maintaining our 2021-22E earnings forecasts.
• Maintain HOLD rating on SD Plantation with an unchanged DCF-derived TP of RM4.90

6M20 Core Net Profit at RM156m – Below Expectations

SD Plantation’s 6M20 revenue was higher by 6.7% yoy to RM6.3bn, due to higher contribution from both the upstream (+1.7% yoy) and downstream (+8.1% yoy) segments. The EBITDA margin improved by 6.2ppt yoy to 19% in 6M20 due to a better margin in the upstream segment given the higher average CPO and PK prices. For 6M20, SD Plantation’s CPO and PK ASPs were higher by 22.8% and 23.7% yoy at RM2,475/MT (6M19: RM2,016/MT) and RM1,394/MT (6M19: RM1,127/MT) respectively, although FFB production declined by 7.3% yoy to 4.6m MT (production was lower throughout its estates in Malaysia, Indonesia and PNG/SI, partly attributable to the lagged effect of adverse weather conditions back in 2019). SD Plantation’s 6M20 PBT, which includes forex loss, fair value gains on commodities, gains on disposal of assets and impairments, surged >100% yoy to RM1.1bn. After excluding the one-off items, 6M20 core net profit for continuing operations was at RM156m, up >100% yoy. This was below expectations, accounting for 31.1% and 26.7% of our previous and the consensus full-year forecasts. The variance to our forecast was partly due to lowerthan-expected contribution from its downstream division.

Sequentially stronger, core net profit increased >100% qoq to RM158m

SD Plantation’s 2Q20 revenue was higher by 5.7% qoq to RM3.2bn but PBT declined by 14.5% qoq to RM519m, partly attributable to lower gains from the disposal of assets and fair value loss from commodity contracts (vs. fair value gains from commodities contracts in 1Q20). After excluding these one-off items, SD Plantation posted a higher core net profit (excluding discontinued operation) of RM158m, up >100% qoq. For the quarter, the group benefited from lower finance costs due to a decline in interest rate and lower tax expense due to the change in corporate tax rates in Indonesia. SD Plantation has declared a DPS of 4.02 sen for the quarter (6M19 DPS: nil).

Maintaining Our HOLD Rating and 12-month TP of RM4.90

Given the weaker-than-expected 6M20 results, we cut our 2020E core EPS by 11.7% to account for lower contribution from the downstream business, while maintaining our 2021-22E forecasts. We expect earnings to improve in 2H20 as we believe FFB and CPO production will continue to pick up as we enter peak production towards Oct/Nov and this should help to bring down unit production costs. We maintain our HOLD rating on SD Plantation and DCF-derived 12-month target price of RM4.90.

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 CPO prices; 3) higher-/lower-than-expected FFB and CPO production; and 4) changes in policies.

Source: Affin Hwang Research - 28 Aug 2020