FY20 CNP of RM839m (+7% YoY) is above our (130%), but below consensus’ (87%), estimate. We are turning positive on the name given: (i) decent FY21E FFB growth (at least 3%), (ii) greater FY21 earnings clarity after selling forward 70% of its Malaysia’s production at a favourable price, and (iii) it is trading at an attractive FY21E PER of 22.5x (akin to small/mid-cap upstream valuations). Raise FY21E CNP by 68% on higher realised CPO price and introduce FY22E CNP of RM1.59b. Upgrade to OUTPERFORM with a higher TP of RM5.50 ona conservative FY21E PER of 25x(to address any ESG/CPO price decline concerns). Even then, the stock still presents an upside of 13.1%.

Above expectations. Sime Darby Plantation Berhad (SIMEPLT) registered 4QFY20 Core Net Profit (CNP) of RM424m, bringing FY20 CNP to RM839m (+7% YoY), which is deemed within our estimate (130%), but below consensus’ (87%) due to higher-than-expected CPO price realised. FY20 FFB output of 9.28m MT (-4% YoY) is spot on our estimate at 100%. A final DPS of 5.42 sen brought FY20 DPS to 9.44 sen (vs. our expected 6.0 sen), a positive surprise.

Results’ highlight. YoY, FY20 CNP rose (+7%) as higher CPO price (+15%) outstripped the decline in FFB output (-4%). This led to a jump (+882%) in Upstream recurring PBIT, pre-fair value gain/loss adjustments. QoQ, 4QFY20 CNP rose (+53%) on the back of: (i) 29% improvement in upstream recurring PBIT as higher CPO price (+6%) overshadowed lower FFB output (-4%), and (ii) surge in downstream recurring PBIT (185%) from better margins and sales volume in Asia Pacific and Europe.

Turning more positive on the name. Even after accounting for labour shortage, management expects FY21 FFB output to at least match that of FY19 which translates to a 3% growth. This is similar to our 4% growth estimate. What is also encouraging is that the group has alleviated its labour shortage situation (from 3,400 workers previously) to c.3,100 workers. From what we understand, the group has locked in sales for 70% of its full-year production for Malaysia at slightly below RM3,000/MT. Malaysia accounts for the bulk of the group’s production (c.53%). We are positive on this for one main reason – it reduces the impact of CPO price volatility on earnings, giving us greater clarity towards FY21 earnings.

Raise FY21E CNP by 68% on higher realised CPO price of c.RM2,820/MT and introduce FY22E CNP of RM1.59b.

Upgrade to OUTPERFORM with a higher Target Price of RM5.50 (from RM5.15) on FY21E PER of 25x (switched from PBV of 2.5x previously) to better reflect its earnings growth potential. Trading at FY21E PER of 22.5x (small/mid-cap upstream valuation level) alongside 81% earnings growth potential, SIMEPLT is now an attractive buy, in our view. Even after ascribing a conservative PER of 25x (vs. typical 30x for large-cap peers) to factor in ESG (note that major customers have not shunned its products) and CPO price decline concerns, the stock still presents 13.1% upside.

Risks to our call include: (i) severe labour shortage, and (ii) changes in Indonesia’s biodiesel levy and export tax structure (though unlikely) which hinders implementing biodiesel mandates.

Source: Kenanga Research - 19 Feb 2021