1QFY20 CNP of RM124m (+55% YoY; +59% QoQ) missed expectations, accounting for merely 15%/17% of our/consensus’ estimate mainly due to lower-than-expected FFB output (-16% YoY). We see further downside risk to FFB growth as Indonesia’s dry patch (Jul to Oct 2019) could adversely affect production in 2020. Cut FY20- 21E CNP by 33-21% on lower FY20-21E FFB growth (3-3%) and CPO price forecast (RM2,300-RM2,400/MT). Still a MARKET PERFORM with a higher TP of RM4.90 (from RM4.80) based on rolled-over FY21E PBV of 2.4x (-1.0SD).

Lower-than-expected production. Sime Darby Plantation Berhad (SIMEPLT) registered 1QFY20 Core Net Profit (CNP) of RM124m (+55% YoY; +59% QoQ), accounting for merely 15%/17% of our/consensus’ estimate. The deviation came from lower-than-expected FFB output of 2.12m MT (-16% YoY), which only made up 21% of our full-year estimate (vs. 26% in 1QFY19). Note that we have excluded land disposal gains amounting to RM262m to arrive at our 1QFY20 CNP. No dividend was declared, as expected.

Higher CPO price capped by lower production. YoY,1QFY20 CNP rose (+55%) on the back of higher CPO price (+55%), which resulted in Upstream core PBIT margin expansion (+27.6ppt). The impact of higher CPO price would have been more pronounced if not for the decline in FFB output (-16%), mainly from Malaysia (-23%). QoQ, a similar pattern is observed. 1QFY20 CNP surged (+59%) as higher CPO price (+16%) outstripped lower FFB (-6%).

Downside risk to FFB growth. Management maintains single-digit FFB growth target. Assuming no changes from previous 5% guidance, this implies May-Dec YoY growth of 14%. Given that Indonesia’s dry patch (Jul to Oct 2019) could exert an adverse impact on production in 2020, we prefer to remain conservative and trim our FY20-21E FFB growth to 3-3%. Meanwhile, we understand the group has only applied 60-70% of the intended fertiliser for 1QFY20. The group remains committed to its asset monetisation plan (disposing of non-core/non-performing assets) with FY20-21E target of >RM1.5b.

Cut FY20-21E CNP by 33-21% on: (i) lower FY20-21E FFB growth (3-3%), (ii) lower FY20-21E CPO price forecast of RM2,300-RM2,400/MT (from RM2,550/MT).

Maintain MARKET PERFORM but with a higher Target Price of RM4.90 (from RM4.80) based on rolled-over FY21E PBV of 2.4x, in-line with large-cap peers’ average which reflects -1.0SD from mean valuation, given: (i) industry wide dry weather impact on FFB output, and (ii) lower CPO prices.

Risks to our call include: (i) severe labour shortage, and (ii) failure to implement biodiesel mandates (B30 in Indonesia and B20 in Malaysia).

Source: Kenanga Research - 27 May 2020