FY19 CNP of RM159m (-78% YoY) came below expectations, accounting for 77%/79% of our/consensus’ full-year estimates, mainly due to: (i) wider-than-expected decline in FFB output (-6% vs. our expected -1%), and (ii) lower-than expected realised CPO price. Moving forward, we expect more pronounced impact of higher CPO price in 1QFY20 earnings. Trim FY20E CNP by 4% and introduce FY21E CNP of RM1,115m. Maintain MARKET PERFORM with a lower TP of RM5.10 based on CY20E PER of 34x (switching from PBV). Positives are already factored in at current price (Fwd. PER of 33x).

Below expectations. Sime Darby Plantation Berhad (SIMEPLT) registered 4QFY19 Core Net Profit (CNP) of RM78m bringing FY19 CNP to RM159m (-78% YoY). This came below expectations, accounting for only 77%/79% of our/consensus’ estimates, mainly due to: (i) wider-than-expected decline in FY19 FFB output (9.68m MT) of 6% (vs. our expected: -1%), and (ii) lower-than-expected realized CPO price of RM2,063/MT (vs. our expected RM2,100/MT). FY19 DPS of 1.0 sen declared against our expected 2.0 sen. Note that we have excluded unrealised losses from fair value of commodity hedges (forward-selling) amounting to RM140m, among others to arrive at our 4QFY19 CNP.

Recovery inhibited by lower production. YoY, FY19 CNP plummeted (-78%) on the back of lower CPO prices (-14%) and lower FFB output (- 6%), which resulted in Upstream core PBIT margin contraction (- 26.5ppt) to 5%. QoQ, 4QFY19 registered CNP of RM78m (+59%) on the back of higher average CPO price (+13%). The impact of higher CPO price would have been more pronounced if not for a 9% decline in FFB output.

More pronounced impact of CPO price rally in 1QFY20. We expect a recognizable sequential improvement in 1QFY20 earnings on the back of higher CPO prices (QTD-1QFY20: +14%). On FFB production, Indonesia’s dry patch (Jul to Oct-2019) is expected to have an adverse impact on production in 2020. Having said that, we understand that management still has an internal FFB target exceeding that of FY19. Meanwhile, the group is in the process of contracting FY20 fertiliser for Indonesia and management believes it should be able to lock in a rate lower than FY19.

Trim FY20E CNP by 4% and introduce FY21E CNP of RM1,115m.

In-line with the adverse weather impact, we trimmed FY20E FFB output by 2% to be conservative but reduced fertiliser costs in Indonesia by 5%, ultimately resulting in 4% cut in FY20E CNP.

Maintain MARKET PERFORM with a lower Target Price of RM5.10 (from RM5.60) as we switched valuation method to PER (from PBV previously due to low earnings base). Our TP is based on CY20E PER of 34x (a slight premium to peers’ average ascribed PER of 31x). We believe our ascribed PER is justified by its: (i) larger upstream exposure making it the most sensitive big cap planter to CPO price, (ii) higher CPO price environment, and (iii) decent FFB growth of c.5%. Having said that, at current price we believe the positives have been priced in. At current price, SIMEPLT is already trading at a Fwd. PER of 33x and hence, our MARKET PERFORM call.

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 Mar 2020