1HFY21 CNP of RM1.09b is above our (64%) and consensus’ (67%) estimates due to higher-than-expected CPO prices. Despite flat FFB growth guidance, 2HFY21 earnings should show continued strength on consistent CPO price. We raise FY21E CNP by 31% on higher CPO price, but lower FFB output estimate. Maintain OUTPERFORM with lower TP of RM4.60 (from RM4.95) @ rolled-over FY22E PER of 18x (from 20x). ESG score is at 78%.

Above expectations on higher realised CPO prices. Sime Darby Plantation Berhad (SIMEPLT) registered 1HFY21 Core Net Profit (CNP) of RM1,093m (+692% YoY), above both our/consensus’ estimates at 64%/67% due to higher- than-expected CPO prices realised. 1HFY21 FFB output of 4.66m MT (+2% YoY) is at 48% of our initial estimate. DPS of 7.9 sen is also within expectation.

Boosted by upstream. YoY, 1HFY21 CNP rose (+692%; from a low base) boosted by: (i) higher average CPO price (+38%), and (ii) FFB output improvement (+2%). Note that there were disposal gains in 1QFY20 amongst others, amounting to RM262m. QoQ, 2QFY21 CNP rose (+21%) mainly led by an improvement in upstream recurring PBIT (+45%) due to higher CPO price (+14%) and higher FFB output (+11%).

Flat FFB growth guidance. Management is guiding flat FY21 FFB growth (vs. our 4%); we believe due to labour shortage in Malaysia and as trees rest in Indonesia. CPO price on the other hand should remain consistent. QTD3QFY21 CPO price is up 3% QoQ. Fertiliser application is on track, with all regions meeting ~80-100% of 1H target. Application schedule is typically 50:50. Overall, we expect continued strength in 2HFY21.

Raise FY21E CNP by 31% on higher realised CPO price of ~RM3,400/MT (vs. RM2,900/MT previously), while imputing flat FFB growth (from 4%).

Maintain OUTPERFORM with a lower TP of RM4.60 (from RM4.95) on a lower rolled-over FY22E PER of 18x (from 20x), reflecting -1.0SD from mean on additional 10% ESG discount. At FY22E PER of 15x (at par with small/mid- cap upstream players’ valuation level), alongside robust earnings growth potential (+165%), SIMEPLT is worth another look. While we think there is downside risk to CPO prices, FY21E earnings are relatively shielded by 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 - 19 Aug 2021