SIMEPLT’s 1QFYE12/18 Core Net Profit (CNP*) of RM121m is below our 6M forecast at 19%, on weaker-than-expected CPO prices and FFB output. No dividend was announced, as expected, but we trim FYE12/18-19E dividend from 7.0-14.0 sen to 2.0-13.0 sen following earnings cut. Reduce FYE12/18-19E CNP by 68-7% to RM211m-1.32b, as we cut our FFB forecasts and CPO price assumption. Maintain MARKET PERFORM with lower TP of RM5.00 (from RM5.35).

Markedly below expectations. Sime Darby Plantation Berhad (SIMEPLT)’s 1QFYE12/18 CNP of RM121m is significantly below our expectation, accounting for only 19% of our semi-annual forecast of RM653m (consensus estimates are only available for FY19 onwards), mainly due to lower-than-expected CPO price (RM2,117/MT in this quarter vs. our assumption of RM2,250/MT for 2HCY18). In addition, FFB output of 2.44m MT this quarter is also below our expectation, making up only 41% of 6M forecast of 5.95m. Overall, these resulted in significant CNP margin erosion from 10% to 4%. No dividend was announced as expected because the company usually announces dividend in 2Q and 4Q. Nevertheless, we revise our FYE12/18-19E dividend downwards from 7.0-14.0 sen to 2.0-13.0 sen in tandem with our earnings cut.

CPO price - the main culprit. YoY, 1QFYE12/18 CNP plummeted 66% mainly due to weaker Upstream performance (core PBIT -54%), which stemmed from lower CPO price (-21% to RM2,117/MT). The lacklustre FFB production was mainly dragged by Malaysia (-17% to 1.29m MT), as the country registered a high base on bumper harvest experienced last year. Fortunately, FFB growth was robust in other geographical segments – Indonesia (+27% to 919k MT), PNG/SI (+27% to 513k MT) and Liberia (+86% to 26k MT) as the estates recovered from flooding and infrastructure damage caused by severe wet weather. Meanwhile, Downstream core PBIT declined 31% to RM48m due to weaker margins for differentiated products amid stiff competition. QoQ, FFB output increased by 13% but CNP tumbled 59% as Upstream core PBIT halved on lower CPO price (-11%). In addition, Downstream core PBIT dropped 29% on softer seasonal demand and sharp margin compression due to lower sales composition of differentiated products (43% this quarter vs. 48% last quarter).

CPO price to improve. In its briefing, management opined that CPO price has likely bottomed out, and guided that it should trade around RM1,900-RM2,200/MT till year-end, before trending higher to RM2,200- RM2,400/MT in 1Q19 and RM2,400-RM2,600/MT by June 2019. The group continues to review its non-core assets for potential disposals, while keeping a lookout for acquisition of new assets in Malaysia and Indonesia related to its core business. We view this positively over the long term as it indicates a continued focus on its core business. Reduce FYE12/18-19E CNP by 68-7% to RM211m-1.32b, as we cut our FFB forecasts from 5.95-11.10m MT to 5.66-10.88m MT and FYE12/18E CPO price assumption from RM2,250/MT to RM2,000/MT.

Maintain MARKET PERFORM with lower TP of RM5.00 (from RM5.35) based on Fwd. PER of 25.7x (-2.0 SD) applied to lower FY19E EPS of 19.4 sen (from 20.8 sen), reflecting its CY19E FFB growth of 4%, its large-cap and FBMKLCI component statuses. Our valuation basis for other planters under coverage ranges from -0.5 to - 3.0 SD levels. We are neutral on SIMEPLT in the near-term due to depressed CPO price and below-average FFB outlook (4% vs. sector average of 5%) and its above-average net gearing level (0.4x vs. sector average of 0.1x).

Source: Kenanga Research - 26 Nov 2018