Sime Darby Plantation Berhad (SIMEPLT)’s FY21 Core Net Profit (CNP) rose 203% YoY to RM2,018m but came 7% below Kenanga’s, and 9% beneath consensus, estimate. Furthermore, 4QFY21 tax was higher and CPO price was lower than expected. Nonetheless, CPO price was strong enough to offset seasonally weaker FFB output. With CPO prices looking to stay higher and longer than earlier anticipated, we are upgrading FY22E earnings by 57%. However, we are rating FY22E EPS at 13x PER or slightly below peers to reflect concerns over recent “forced labor” issues and slow FFB growth of 2-4% a year to give a new target price of RM5.25. Maintain our MP recommendation.

Slightly below expectations: Strong CPO price of RM4,179 per MT (+11% QoQ, +57% YoY) lifted 4QFY21 CNP by 214% YoY to RM468m. However, QoQ, 4QFY21 CNP actually dipped 23% due to much higher taxes. Otherwise, 4QFY21 earnings would have been stronger than reported in 3Q.

(a) Upstream - 4QFY21 FFB production was lower than expected at 2.124m MT (-9% QoQ, -8% YoY) while full-year output also declined by 2% YoY to 9.129m MT due to labour shortfall and year-end flash floods in Peninsula Malaysia. FY21 Indonesian and PNG fruit productions were healthy though, up 3% and 4% YoY, respectively on larger prime age area. Most of all, FY21 upstream earnings soared on average CPO price of RM3,711 per MT (+47% YoY) as inventory and supply levels global edible oils & fats were tight.

(b) Downstream EBIT improved 42% YoY on higher volume and better margins achieved in 1HFY21 and 4QFY21, compensating for the RM129mn unrealised losses registered in 3QFY21 arising from commodity hedging. QoQ, downstream EBIT recovered from just RM7m in 3QFY21 to RM287m in 4QFY21.

Healthy CPO price outlook: The global edible oil & fats market ended 2021 with only slightly higher inventories compared to a year ago, so supply of edible oils & fats remains tight thus far. Hopes of good soyabean harvest from South America easing the tightness is being dampened by poor weather leaving only the prospects of pending North American soyabean planting to help boost 2022 supply. Palm production meanwhile is still hampered by labour issues, notably the shortfall in Malaysia. Therefore, even though edible oils & fats supply should improve over 2022, progress has been slow and until inventories have actually risen sufficiently, CPO prices are likely to stay elevated. We expect CPO prices to ease from current lofty level of over RM5,500 to RM3,500 by year-end giving SIMEPLNT an average CPO price of RM4,000 per MT for FY22 (vs. our old CPO price estimate of RM3,200/MT). Production cost is also heading higher, by as much as 10% YoY on rising input costs, notably fertiliser among others while FFB production is expected to nudge up by about 3% a year. All in all, we are revising up FY22E CNP from RM1,568m to RM2,701m on higher CPO prices.

Labor issue being addressed: The US Customs and Border Protection have barred the Group’s palm products from entering US on “forced labor” issues in Dec 2020 which it reiterated in Jan 2022. On 15 Feb 2022, after concluding its own investigation, SIMEPLT announced that around 35K of guest workers - without the Group’s knowledge - had paid recruitment fees back in their home country. SIMEPLT has agreed to compensate them and is now strengthening various recruitment, communication and workplace SOPs.

Maintain MP but upgrade TP from RM4.10 to RM5.25 on more conservative PER of 13x as (a) recent “forced labor” issues which may temporarily deny SIMEPLT higher or premium valuations (b) with limited FFB growth, forward EPS hinges very much on CPO prices and (c) average CPO is expect to ease in FY23. Also, historically our preferred plantation exposure, KLK, enjoyed higher ROEs compared to SIMEPLT. Nevertheless, the Group should gain from elevated CPO prices in FY22.

Source: Kenanga Research - 21 Feb 2022