1Q19 CNP* of RM52m (-74% YoY; -40% QoQ) came below expectations at 5% of consensus full-year estimate and 10% of ours, mainly due to higher-than-expected production cost. However, 1Q19 FFB output of 2.52m MT (+8% YoY) aligned with our expectation at 23%. No dividend was declared during the quarter, as expected. Slash FY19E CNP by 17% to RM417m but maintain FY20E CNP of RM1.1b. Maintain UP with TP of RM4.00.

Below expectations. Sime Darby Plantation Berhad (SIMEPLT)’s 1Q19 Core Net Profit (CNP*) of RM52m (-74% YoY; -40% QoQ) came below expectations at 5% of consensus full-year estimate and 10% of ours, mainly due to higher-than-expected production cost (c.RM1,500/MT vs. our RM1,450/MT assumption). Nevertheless, 1Q19 FFB output of 2.52m MT (+8% YoY) was inline with our expectation at 23%. No dividend was declared during the quarter, as expected.

Downstream not much of a help. YoY, 1Q19 CNP plummeted 74% to RM52m on weaker Upstream performance (core PBIT -71% to RM83m), as an 8% FFB growth failed to offset lower CPO price (-18% to RM2,012/MT). Meanwhile, Downstream’s core PBIT jumped 31% to RM85m on cheaper feedstock and higher sales volume (+11%), which was underpinned by favourable import duties in India and zero export levies in Indonesia. QoQ, despite higher CPO prices (+8%), Upstream PBIT tumbled 55% on seasonal FFB decline (-10%). In addition, Downstream’s core PBIT also declined 13% owing to lower sales volume (-14%). Overall, these resulted in a 40% drop in the group's CNP.

Weakness to linger. In its briefing, management noticeably toned down its CPO price guidance – now foreseeing it to be traded in the range of RM2,000-2,250/MT in 2H19 vs. RM2,250-2,450/MT previously – citing uncertainty from the US-China trade war. We are slightly more pessimistic, with CPO price forecast range of RM1,800-2,100/MT for 2H19, as we expect rising stockpiles in both Indonesia and Malaysia (possibly revisiting the 3.0m-MT mark) to place tremendous pressure on CPO prices. On the production front, management targets 3-5% YoY FFB growth in 2Q19, translating into -0.4% to +1.5% sequential production change. Coupled with uninspiring Downstream margins amid intense competition from Indonesia, we expect earnings to remain weak in 2Q19. On a brighter note, the group remains committed to its RM1b asset monetisation plan (disposing of non-core/non-performing assets), with 80% expected to be completed this year. Management guided that about nine-tenths of the sales value would be registered as gain on disposals, translating into c.15.00 sen (or 8%) increase in BVPS upon full execution of the plan.

Slash FY19E CNP by 17% to RM417m after raising our unit production cost assumption from RM1,450/MT to RM1,500/MT; but

maintain FY20E CNP of RM1.1b and unit production cost of RM1,500/MT as we expect unit cost to be contained by FFB growth and improved efficiency from mechanisation efforts.

Maintain UNDERPERFORM with an unchanged Target Price of RM4.00 based on sum-of-parts (SoP) valuation with the plantation segment valued at 25.7x CY20E PER, implying -2.0SD from its historical mean. We believe the group’s near-term plantation earnings will be impeded by the depressed CPO price environment, while its downstream margins are also under pressure amid stiff competition. At current price, valuation appears expensive at CY20E PER of 29.9x (mean).

Source: Kenanga Research - 3 Jun 2019