1HFY20 CNP of RM150m (+124% YoY) is deemed within both our (28%) and consensus’ (26%) estimates, in light of an expected stronger 3QFY20. Interim and special DPS totalling 4.02 sen is a positive surprise. Management’s revised flat FY20 FFB outlook is in line with ours (-0.5% YoY). CPO price is expected to range around RM2,500-2,600/MT, while CPO production cost could creep up slightly to RM1,600/MT (in-line with our forecast) in the 2HFY20 on higher fertiliser application. No changes to earnings estimate, but raise FY20E DPS to 5.0 sen (from 4.0 sen). Still a MARKET PERFORM but with a higher TP of RM5.10 (from RM4.90) based on a higher FY21E PBV of 2.5x, to reflect -0.5SD from mean (vs. -1.0SD previously).

Deemed within expectation. Sime Darby Plantation Berhad (SIMEPLT) registered 2QFY20 Core Net Profit (CNP) of RM126m, bringing 1HFY20 CNP to RM150m (+124% YoY), which is deemed within both our (28%) and consensus’ (26%) estimates in light of an expected stronger 3QFY20. Note that we have excluded gains from land disposal and divestment of subsidiaries, among others amounting to RM459m to arrive at our 1HFY20 CNP. 1HFY20 FFB output of 4.59m MT (-7% YoY), is also within expectation at 48% of our full year estimate. Interim and special DPS, totalling 4.02 sen is a positive surprise.

1HFY20 lifted by higher CPO prices. YoY, 1HFY20 CNP rose (+124%)as higher CPO price (+23%) outstripped the decline in FFB output (-7%). This led to a jump (+924%) in Upstream’s recurring PBIT. QoQ, the increase (+17%) in 2QFY20 FFB output overshadowed lower CPO price (-9%). This impact can be seen through the improvement (+164%) in Upstream’s recurring PBIT after adjusting for FV gains/loss in commodities future contracts (CFC) and forward exchange contracts (FEC). Ultimately, this resulted in 2QFY20 CNP expanding (+425%) to RM126m. The improvement would have been more significant if not for the 73% virus-led decline in downstream PBIT.

Management toned down FY20 FFB growth guidance. Management has revised FY20 FFB growth guidance to a flat outlook – in view of the impact from: (i) dry weather in 2019, and (ii) foreign labour shortage (currently short c.10% of requirement). This flat outlook is in-line with our FY20E FFB growth target of -0.5%. Peak production is still expected to kick-in during the month of September to October. While, 1HFY20 CPO production cost was around RM1,550/MT, cost could creep up to RM1,600/MT on higher fertiliser application in 2HFY20. Meanwhile, management expects CPO price for 2HFY20 to range at RM2,500-RM2,600/MT. The group remains committed to its asset monetisation plan (disposing of non-core/non-performing assets) with an 18- month target of c.RM1.5b. Nevertheless, we look forward to a stronger 3QFY20 premised on: (i) higher CPO price (QTD 3QFY20: +18% QoQ), and (ii) anticipation of higher FFB output as we enter peak production season.

No changes to earnings estimates as results were within expectations. However, we raise FY20E DPS to 5.0 sen (from 4.0 sen).

Maintain MARKET PERFORM but witha higher Target Price of RM5.10 (from RM4.90) based on a higher FY21E PBV of 2.5x, to reflect -0.5SD from mean (vs. -1.0SD from mean previously). In light of: (i) sequential earnings improvement in 3QFY20, (ii) value unlocking from sales of non-core assets, and (iii) peers’ being traded at -0.5SD to mean valuation level, we think our higher ascribed -0.5SD valuation (from -1.0SD) is fair.

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 - 28 Aug 2020