1QFY21 CNP of RM495m is above our (33%) and consensus’ (37%) estimates due to higher-than-expected CPO prices. We like SIMEPLT for its: (i) appealing valuations – FY21E PER of c.18x (akin to small/mid-cap upstream players’ valuations), and (ii) FY21 earnings growth potential of 102%. While there is downside risk to CPO prices, the group’s earnings are relatively shielded after selling forward c.80% of its Malaysia’s production. Maintain OUTPERFORM call. Despite applying a lower ESG-adjusted FY21E PER of 23x (from 25x), TP is nudged higher to RM5.65 as we raise FY21-22E CNP by 12% each on higher realised CPO prices.

Above expectations on higher realised CPO prices. Sime Darby Plantation Berhad (SIMEPLT) registered 1QFY21 Core Net Profit (CNP) of RM495m (+17% QoQ; >8x YoY), above both our/consensus’ estimates at 33%/37% due to higher-than-expected CPO prices realised. 1QFY21 FFB output of 2.21m MT (+4% YoY) is within our estimate at 23%. Absence of DPS is as expected.

Higher CPO prices overshadow blip in production. YoY, 1QFY21 CNP rose (>8x; from a low base) boosted by: (i) higher average CPO price (+22%), (ii) FFB output improvement (+4%), and (iii) lower tax expense (-8%). QoQ, 1QFY21 CNP rose (+17%) on the back of improvement in upstream recurring PBIT (+55%) as higher CPO price (+20%) overshadowed lower FFB output (-4%) and weaker downstream recurring PBIT (-47%).

We like its earnings clarity. Even after accounting for labour shortage, the group is on track to meet our FY21 FFB growth target of 4%. Meanwhile, the group has locked in sales for 80% of its full-year production for Malaysia at c.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, hence giving us greater clarity in FY21E earnings.

Raise FY21-22E CNP by 12% on higher realised CPO price of RM2,900/MT (vs. RM2,820/MT previously).

Maintain OUTPERFORM with a higher Target Price of RM5.65 (from RM5.50) on a lower FY21E PER of 23x (from 25x), reflecting -0.75SD from mean to incorporate an ESG discount. We think the name is appealing at FY21E PER of c.18x (at par with small/mid-cap upstream players’ valuation level) along with its robust earnings growth potential of 102% in FY21. While we think there is downside risk to CPO prices, FY21E earnings are relatively shielded by the forward sales, making it an attractive upstream play. Based on our in-house ESG scoring of planters under our coverage, SIMEPLT ranks fourth with an ESG score of c.78%.

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

Source: Kenanga Research - 21 May 2021