2Q19 posted a core net loss CNL* of RM13m in 2Q19, dragging 1H19 core net profit (CNP) down to RM39m. The 1H19 CNP was markedly below expectations, accounting for only 7% of consensus full-year estimate and 9% of ours, mainly due to weaker-than-expected FFB output. No dividend was declared during the quarter, as expected. Slash FY19-20E CNP by 40-19% to RM252-862m. Maintain UP and TP of RM4.00.

Below expectations. Sime Darby Plantation Berhad (SIMEPLT) posted a core net loss (CNL*) of RM13m in 2Q19, dragging 1H19 core net profit (CNP) down to RM39m. The 1H19 CNP was markedly below expectations, accounting for only 7% of consensus full-year estimate and 9% of ours, mainly due to weaker-than-expected FFB growth of 3.7% in 1H19 vs. our FY19 assumption of 5.3%. No dividend was declared during the quarter, as expected.

Downstream not much of a help. YoY, 1H19 CNP plummeted 92% on poorer Upstream performance (core PBIT -97% to RM19m), as 3.7% FFB growth failed to offset a 16% decline in the average CPO price. A marginal improvement in Downstream’s core PBIT (+2.3% to RM136m) did little to cushion the Upstream weakness. QoQ, despite flat CPO prices, Upstream PBIT dived into loss of RM64m from a profit of RM83m on a 3.6% seasonal FFB decline amid shorter working month during Eid al-Fitr. In addition, despite a 4% increase in sales volume, Downstream’s core PBIT declined 40% to RM51m as more stringent Glycidyl Ester compliance requirement in Europe resulted in higher processing costs, denting the segment’s margin to 2.3% from 3.7% in 1Q19. These were partially offset by positive taxation of RM83m arising from the recognition of deferred tax asset on losses on the disposal of PT MAS during the quarter, and unrealised profit on land sale amid change in Real Property Gains Tax (RPGT) rate in Malaysia. Overall, the group posted CNL of RM13m vs. CNP of RM52m last quarter.

Better 2H. We expect the group to return to profitability in subsequent quarters, driven by seasonally higher FFB output and a recovery in the CPO price. Management expects CPO to hover around RM2,200/MT in 2H19 (vs. MPOB’s CPO price of RM2,145/MT currently). The group remains committed to its RM1b asset monetisation plan (disposing of non-core/non-performing assets), with 3,300 acres of land identified for sales for the purpose of property development and government infrastructure projects. In addition, the group expects to conclude the disposal of Liberia asset by year-end of which the group is currently in talks with three parties. In the event that no buyer can be identified, the group shall hand over the concession back to the Liberian government, which will likely be accompanied with asset write-offs (carrying value of the Liberian asset stands at c.USD55m).

Slash FY19-20E CNP by 40-19% to RM252-862m after cutting our FFB forecasts from 10.9-11.2m MT (+5-3% YoY) to 10.5-10.8m MT (+2-3% YoY).

Maintain UNDERPERFORM with an unchanged Target Price of RM4.00 based on CY20E PBV of 2.0x (switched from 25.7x PER valuation previously), a discount to the large-cap peer average of 2.5x given its extremely low-base earnings. Its downstream margins are also under pressure amid stiff competition from Indonesia. Our TP implies a CY20E PER of 31.5x and the company is currently trading at an unexciting CY20E PER of 39.3x.

Risks to our call include sharp rises in CPO prices and significant improvement in downstream margins.

Source: Kenanga Research - 3 Sep 2019