Sime Darby Plantation Berhad (SIMEPLT) 1H18 Core Net Profit (CNP*) at RM609m came in within consensus expectations at 47% and broadly within our forecast at 44%. An interim dividend of 3.5 sen was announced. We adjust our estimates in accordance to the newly announced December FY-end but maintain earnings assumptions. Maintain MARKET PERFORM with higher TP of RM5.90 as we roll forward our valuation base to average CY18-19E.

1H18 within expectations. SIMEPLT recorded 1H18 CNP of RM609m, coming in within expectations of consensus RM1.30b at 47% and broadly within our RM1.40b forecast at 44% as we note that 1H contribution tends to be slightly weaker at 44% of full-year earnings in the past 3 years. FFB production at 5.46m metric tons (MT) is in line at 53% of our forecast. An interim dividend of 3.5 sen was announced, making up 27% of our full-year forecast, though we expect higher payout in the 4th quarter, in line with previous trends. Note that management also announced a change in its fiscal year end to December, to be implemented after the FY June 2018, for a subsequent 6-month FY to Dec 2018.

Yield recovery. YoY, CNP improved 13% as FFB production recovery (+12%) led to improved upstream revenue (+22%) and core PBIT, exland sale and donation (+40%), in spite of weaker CPO prices (-2%). Downstream PBIT softened (-26%) on thinner margins (from 3.5% to 2.3%) as bulk sales saw lower margins on a declining CPO price environment. QoQ, CNP jumped by 122% as upstream core PBT improved 32% thanks to better Malaysia revenue contribution (+138% to RM354m) as the region saw FFB recovery (+9% to 1.69m MT) and flat CPO prices (-1% to RM2,706/MT). Otherwise, downstream PBIT contribution softened 9% on similar soft bulk sub-segment margins.

M&A ahead? In the 2Q18 analysts briefing, management signaled two potentially significant transactions. Firstly, management has confirmed its intention to pare down its stake in its subsidiary New Britain Palm Oil Limited (NBPOL) to 51-60% (currently 100%), which could potentially raise RM2.3-2.8b for the company, thereby cutting FY19E net gearing to a comfortable 0.3x. However, management indicated that they are interested in a strategic investor, preferably from PNG, and are in no hurry to dispose of its stake given their solid existing cash flows. Secondly, SIMEPLT has signaled its interest in acquiring Indian edible oil player Ruchi Soya, which is undergoing bankruptcy proceedings with an “expression of interest” submission, although we note that this is highly preliminary with competing bidders, including major players such as Adani Wilmar, Godrej Agrovet, Cargill, ADM and Musim Mas. At a market cap of c.RM360m, we would expect relatively low gearing impact to SIMEPLT should the deal go through, although earnings impact may also be limited given the distressed status of the company.

Adjusted earnings on change in year end. While we maintain our earnings assumptions, we adjust our FY18-19E forecasts to reflect the new year end, for FY18E CNP of RM1.40b, 6MCY18E CNP of RM775m, and FY19E CNP of RM1.57b.

Maintain MARKET PERFORM with higher TP of RM5.90 (from RM5.50) as we roll forward our valuation base year to average CY18- 19E for higher applied EPS of 22.9 sen (from 21.2 sen). Our Fwd. PER is unchanged at 26.0x, implying a 5% premium to integrated peers’ valuation thanks to SIMEPLT’s market leadership position. However, we maintain our MARKET PERFORM call on SIMEPLT in view of its average near-term production growth (CY18-19E of 5% vs. sector average of 8%).

Source: Kenanga Research - 23 Feb 2018