SIMEPLT 9M18 Core Net Profit (CNP*) of RM852m came in below both consensus and our forecast at 65% and 61%, respectively, on higher-than-expected unit cost due to lower selling prices, aggressive replanting and low production season. No dividend was announced, as expected. We lower FY18-6M18-FY19E CNP by 9-7-6% to RM1.27b, RM724m and RM1.48bm respectively. Maintain MARKET PERFORM with lower TP of RM5.60 (from RM5.90).

9M18 below expectations. Sime Darby Plantation Berhad (SIMEPLT)’s 9M18 CNP at RM852m is below expectations, at 65% of consensus’ RM1.32b forecast and 61% of our RM1.40b estimate on above expected unit cost due to severe weather impact. However, FFB production at 7.80m metric tons (MT) is within expectations, at 76% of our 10.20m MT forecast. No dividend was announced, as expected.

Flat performance. YoY, 9M18 CNP was flat with higher FFB production (+6%) offset by lower CPO prices received (-9%). In the Upstream segment, core PBIT (excluding non-recurring disposals) declined 7%. Although Malaysia-led FFB production grew at +19% to 4.61m MT, this could not offset weaker margins from Indonesia (-9% to 1.96m MT) and PNG (-7% to 1.18m MT) due to severe wet weather which led to flooding and infrastructure damage at the estates. Downstream core PBIT declined 12% to RM199m on weaker bulk demand for basic refined products due to the local export tax suspension. QoQ, 3Q18 CNP weakened 42% on both lower CPO prices (-8%) and FFB production (-15%). Upstream core PBIT halved on margin compression from wet weather and seasonally lower production, where Malaysia declined 20% to 1.37m MT and Indonesia weakened 27% to 523k MT. Downstream PBIT improved 2% on higher Bulk contribution (+80% to RM18m) likely on better seasonal demand.

Streamlining core businesses. Management expects FFB production to improve on better Malaysian production, although Indonesia and PNG are both likely to see decline due to weather disruptions in 2HFY18. We concur with management’s outlook, and maintain our estimate of +4% FFB growth in FY18. In its analysts’ briefing, management discussed impairments and write-downs to-date, which involved non-core businesses, including Indonesian rubber assets and biotech businesses. We gather that management is continuing its review of non-core and non-performing assets, to be completed by year-end. This may include partial disposals of its estates or refineries. Management also did not rule out acquisition of new plantation area in existing regions, including PNG. We view this as a long-term positive as it indicates a continued focus on core business segments. However, management noted that the potential minimum wage hike would negatively impact cost of production, although we think that the recently announced postponement should ease short-term cost worries for the sector.

Reduce FY18E, 6M18E, FY19E CNP by 9%, 7%, -6% to RM1.27b, RM724m and RM1.48b, respectively, as we update our cost assumptions to reflect narrower margins due to severe weather issues.

Maintain MARKET PERFORM with lower TP of RM5.60 (from RM5.90) based on unchanged Fwd. PER of 26.0x applied to lower average CY18-19E EPS of 21.5 sen (from 22.9 sen). Our target Fwd. PER of 26.0x implies 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 nearterm production growth (CY18-19E of 5% vs. sector average of 8%).

Risks to our call include: lower-than-expected CPO prices, lower-thanexpected production, and higher-than-expected fixed costs.

Source: Kenanga Research - 1 Jun 2018