We came away from a meeting with SIMEPLT’s investor relations representatives, Mr. Benjamin Poh and Ms. Hezreen Fareisham, maintaining neutral on its near-term prospects. FFB growth outlook is guided at 5% in FYE12/19. Besides FFB and CPO price growth, earnings improvements should stem from recovery in Downstream operations and cost reduction. CPO price is expected to recover to RM2,300-2,400/MT. Maintain MARKET PERFORM with TP of RM5.00.

Neutral production outlook. Management guided for low-to-mid single-digit FFB growth outlook across its Malaysia, Indonesia and PNG & SI segments. On the other hand, FFB growth in Liberia is expected to be robust at possibly 50-60% given its very young tree age profile (average 5.4 years old), but we note that contribution from the segment is not overly material as its planted oil palm area only constitutes c.2% of the group’s total. We also understand that overall group’s mature area should remain relatively unchanged from 2018. As such, we estimate FYE12/19 FFB growth at 5%, in line with the sector’s average.

Operational efficiencies to drive cost reduction. We expect the group’s ex-mill cost of production to improve to RM1,200/MT in FYE12/19 from RM1,260/MT in FYE6/18. The group aims to achieve cost reduction by optimising fertiliser application (hence lower usage), rationalising head office expenses in PNG and improving labour efficiency. Currently, labour efficiency has ample room for improvement - Indonesia with labour:ha ratio at 1:7.5 and PNG at 1:5, compared with the better benchmark of 1:10 in Malaysia.

Downstream to recover as competition eases. Recall that Downstream PBIT plummeted 31% in 1QFYE12/18 as PBIT from differentiated products nosedived 81% amid a competitive environment. During the period, sales composition of differentiated products fell to 43% vs. 48% in the previous quarter. We understand that the stiff competition in the differentiated products segment has eased, and the sales composition of differentiated products is expected to recover to 50% in FYE12/19. Overall, Downstream profit margin should improve from the current 2% to 3% in FY12/19. Downstream accounted for 19% of the group’s PBIT in 1QFYE12/18.

CPO prices to recover. Management expects CPO prices to average between RM2,300/MT and 2,400/MT in 2019, in line with our RM2,400/MT forecast. This represents an improvement from 2018’s average of RM2,235/MT driven by biodiesel initiatives as well as slowing production growth in Indonesia after a robust year.

No change in FYE12/18-19E CNP of RM211m-1.32b as guidance was in line with our expectations.

Maintain MARKET PERFORM with unchanged TP of RM5.00 based on Fwd. PER of 25.7x (-2.0 SD) applied to FY12/19E EPS of 19.4 sen, reflecting its CY19E FFB growth of 5%, as well as its large-cap and FBMKLCI component statuses. Our valuation basis for other planters under coverage ranges from -1.0 to -3.0 SD levels. Despite potential improvements in CPO prices, we are neutral on SIMEPLT for the nearterm due to its average FFB outlook and above-average net gearing level (0.4x vs. sector average of 0.1x).

Risks to our call include sharp rises/falls in CPO prices and a precipitous rise in labour / transportation / fertiliser costs.

Source: Kenanga Research - 25 Jan 2019