6MFPE18 CNP of RM221m came within our forecast with a minor 5% positive deviation. YoY, 6MFPE18 CNP plunged 75% as 2% FFB growth failed to offset a 26% decline in CPO price. QoQ, 2Q18 CNP fell 36% as a 12% decline in CPO price dwarfed the monotonous FFB growth of 2%. A 1.7 sen dividend was declared, marginally below our 2.0 sen forecast. Fine-tune FY19E CNP to RM1.32b and introduce FY20E CNP of RM1.42b. Maintain MP with TP of RM5.00.

Within expectation. Sime Darby Plantation Berhad (SIMEPLT)’s 6MFPE18 core net profit (CNP*) of RM221m (-75% YoY) came within our forecast with a minor 5% positive deviation (consensus estimates are only available for FY19 onwards). 6MFPE18 FFB output of 5.56m MT (+2% YoY) was also within our expectation at 98%. A final dividend of 1.7 sen (payout: c.51%) was declared, below our 2.0 sen forecast (payout: c.65%).

CPO price - the main culprit. YoY, 6MFPE18 CNP plummeted 75% to RM221m mainly due to weaker Upstream performance (core PBIT, - 62% to RM385m), which stemmed from lower CPO price (-26% to RM1,974/MT). The lacklustre FFB production (+2%) was mainly dragged by Malaysia (-14% to 2.80m MT), as the country registered a high base on bumper harvest experienced last year. Fortunately, this was cushioned by robust FFB growth in other geographical segments – Indonesia (+19% to 1.71m MT), PNG/SI (+33% to 994k MT) and Liberia (+76% to 51k MT) as the estates recovered from flooding and infrastructure damage caused by severe wet weather. Meanwhile, Downstream core PBIT improved 9% to RM146m on cheaper feedstock and higher sales volume of bulk products, dwarfing the slowdown in specialty products arising from stiffer competition.

QoQ, 2Q18 CNP fell 36% to RM86m as flattish FFB growth (+2%) failed to offset a 12% decline in the CPO price to RM1,870/MT, resulting in an 8% drop in Upstream core PBIT. In addition, the quarter’s effective tax rate was notably higher at 35% (vs. 28% last quarter). These were alleviated by a doubling of Downstream core PBIT to RM98m.

CPO price to improve. In its briefing, management opined that immediate upside for CPO price is capped at RM2,200/MT, but likely to trend up to RM2,250-RM2,450/MT from April onwards, driven by rising demand from China and India. The group continues to review its non- core assets for potential disposals, including its c.10,000ha of mature area in Liberia, for which decision should be made in the next 3 months. We view this positively as the investment has been constantly loss- making and RM327m of its value has been impaired thus far. We estimate that the asset now has a carrying value of c.RM250m. Fine-tune FY19E CNP by 0.3% to RM1.32b post housekeeping and introduce FY20E CNP of RM1.42b. We are projecting FFB growth of 5-3% and CPO price of RM2,400/MT in FY19-20E. Our DPS forecasts are based on 55% payout ratio.

Maintain MARKET PERFORM with an unchanged TP of RM5.00 based on Fwd. PER of 25.7x (-2.0 SD) applied to FY19E EPS of 19.4 sen, reflecting its CY19E FFB growth of 5%, its large-cap and FBMKLCI component statuses. Our valuation basis for other planters under coverage ranges from -1.5 to -2.5 SD levels. Despite potential improvements in CPO price, we are neutral on SIMEPLT for the near- term due to its average FFB outlook and its above-average net gearing level (0.4x vs. sector average of 0.1x), which could be a potential factor for the lower dividend payout.

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

Source: Kenanga Research - 01 Mar 2019