9MFY19 CNP of RM93m (-85% YoY) came below expectations, accounting for 26%/30% of our/consensus’ full-year estimates, mainly due to: (i) lower-than-expected FFB output, and (ii) higher-than-expected production cost. No dividend was declared, as expected. Reduce FY19-20E CNP by 43-16% to RM206-858m. Maintain MARKET PERFORM with a lower TP of RM5.00.

Below expectations. Sime Darby Plantation Berhad (SIMEPLT) registered 3QFY19 Core Net Profit (CNP*) of RM53m bringing 9MFY19 CNP to RM93m (-85% YoY). This came below expectations, accounting for only 26%/30% of our/consensus’ estimates, mainly due to: (i) lower than-expected 9MFY19 FFB output growth of only 1% (to 7.42m MT) vs. our growth estimate of 5%, and (ii) higher-than-expected 9MFY19 CPO production cost which we believe was c.RM1,600/MT (vs. our expected RM1,500/MT). Note that we have excluded a series of impairments amounting to RM299m mainly from discontinuing operations. No dividend was declared, as expected.

Lower CPO price – the culprit. YoY, 9MFY19 CNP plummeted (-85%) on the back of lower CPO prices (-14%) and lower FFB output (-1%), which resulted in Upstream core PBIT margin contraction (-28ppt) to 7%. Meanwhile, Downstream’s core PBIT increased 13% to RM204m on cheaper feedstock and higher sales volume, underpinned by zero export levies in Indonesia and Malaysia. QoQ, 3QFY19 registered CNP of RM53m (from CNL of RM13m in 2QFY19) attributed to: (i) higher FFB output (+1%), and (ii) improvement in OER (+0.61ppt) to 21.85%. Additionally, Downstream’ core PBIT rose (+33%) on higher capacity utilisation (+6ppt) which also contributed to the improvement.

Full impact of CPO price rally may not be felt in 4QFY19. In SIMEPLT’s quarterly explanatory notes, management highlighted that the group has already committed to forward sales, which we gathered is set at around RM2,300-RM2,400/MT. As such, although we expect to see a sequential earnings improvement in 4QFY19, the impact from the CPO price rally could be slightly muted. Meanwhile, its sugar division is expected to remain a drag as it recovers from the pest issue, while harvesting season is also over.

Reduce FY19-20E CNP by 43-16% to RM206-858m after: (i) lowering our FY19-20E FFB output from 10.5-10.8m MT (+3/+3% YoY) to 10.1- 10.4m MT (-1%/+3% YoY), and (ii) raise FY19-20E production cost from RM1,500-1,500/MT to RM1,600-1,600/MT.

Maintain MARKET PERFORM with a lower Target Price of RM5.00 (from RM5.10) based on 2.52x CY20E PBV (vs. peers’ 2.5x), reflecting -0.5SD from mean given its low earnings base. Risks to our call include: (i) sharp rise/fall in CPO prices, (ii) higher/lower-than expected FFB output, and (iii) precipitous rise/fall in fertilizer/labour/transportation costs.

Source: Kenanga Research - 2 Dec 2019