9MFY20 CNP of RM427m (+9% YoY) is deemed within both our (66%) and consensus’ (62%) estimates. Management’s 3-4% YoY decline in FY20 FFB production expectation is in line with ours (-3%). Anticipating: (i) lower FFB output, (ii) higher production cost in 4QFY20 from higher fertiliser application and dip in FFB output, and (iii) lower realised CPO price (forward sales) to weaken initial higher CPO price impact (QTD 4QFY20: +15% QoQ). No changes to earnings estimate. At FY21E PER of 39x (44% premium to peers), we maintain our MARKET PERFORM call with an unchanged TP of RM5.15 based on a FY21E PBV of 2.5x (-0.5SD).

Deemed within expectation. Sime Darby Plantation Berhad (SIMEPLT) registered 3QFY20 Core Net Profit (CNP) of RM277m, bringing 9MFY20 CNP to RM427m (+9% YoY), which is deemed within both our (66%) and consensus’ (62%) estimates. 9MFY20 FFB output of 6.98m MT (-6% YoY), is also within expectation at 75% of our full-year estimate. Absence of DPS is as expected.

Results highlight. YoY, 9MFY20 CNP rose (+9%) as higher CPO price (+24%) outstripped the decline in FFB output (-6%). This led to a jump (+550%) in Upstream’s recurring PBIT. QoQ, 3QFY20 CNP rose (+120%) on the back of higher CPO price (+6%), overshadowing a dip (-3%) in FFB output. This was not reflected in upstream segmental recurring PBIT mainly due to: (i) FV loss in commodities future contracts (CFC) and forward exchange contracts (FEC) of RM36m (vs. gains of RM15m in 2QFY20), and (ii) forex loss of RM26m (vs. forex gain of RM53M in 2QFY20).

FFB output expectations on track. Recall that in 2QFY20, management toned down FY20 FFB growth guidance to a flat outlook. Now, management expects FY20 FFB production to close 3-4% lower YoY, which is in-line with our FY20 FFB growth of -3%. We anticipate higher 4QFY20 CPO production cost on: (i) higher fertiliser application for the quarter, and (ii) seasonal dip in FFB output (peak production in Malaysia is over). From what we understand, YTD fertiliser application stands at 75% (Malaysia) and 68% (Indonesia), while the group targets c.90% application by year-end. Based on the reasons above, and the fact that the group also typically sells forward, the group may not be able to fully capitalise on current high CPO prices (QTD 4QFY20: +15% QoQ).

No changes to earnings estimate as results were within expectations.

Maintain MARKET PERFORM with an unchanged Target Price of RM5.15 based on FY21E PBV of 2.5x, to reflect -0.5SD from mean. Premised on our view that CPO price could be under pressure in the coming months, we believe our ascribed -0.5SD valuation is fair. Based on PER valuations, SIMEPLT is traded at FY21E PER of 39x (c.44% premium to large-cap peers’ average). The premium could be due to the group’s greater earnings sensitivity toward CPO price (larger upstream: c.80% earnings), especially in the current high CPO price environment. However, at 44% premium to its peers, we believe this is already priced in, warranting a MARKET PERFORM call.

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 - 24 Nov 2020