SIMEPLANT’s 1QFY22 Core Net Profit (CNP) of RM807m (+186% QoQ, +63% YoY) came within our estimates (over slightly by 1%) but exceeded consensus by 10%. The strong performance was underpinned by strong palm product prices while production was weaker QoQ as well as YoY. However, CPO price is expected to ease due to seasonally higher harvest in 2HCY22 but price downside is likely to be moderated by tight global edible oils market. We are adjusting up FY22-23 Core EPS by 1% and 5%, respectively, on firm palm prices staying longer but maintaining our MARKET PERFORM and TP of RM5.25.

Within Kenanga’s expectations: The strong 1QFY22 CNP was essentially lifted by strong Upstream EBIT of RM886m (+19% QoQ, +33% YoY) thanks to firmer average CPO price of RM4,465 (+7% QoQ, +40% YoY). Nevertheless, earnings would have been higher if not for it having sold forward at lower prices as well as poorer FFB harvest of 1.910m MT (-10% QoQ, - 13% YoY). Downstream earnings were mixed. After a strong 4Q last year, 1QFY22 Downstream EBIT of RM132m was weaker by 54% QoQ but still 24% stronger YoY. No dividend was announced for 1QFY2 as was 1Q a year ago. The Group’s financial position continues to improve, with net gearing nudging down from 38% as at end Dec 2021 to 37% by the close of March 2022.

Outlook: We are expecting the supply of the world’s leading vegetable oils, palm and soyabean, to pick up seasonally in the 2H of CY22. This in turn should exert some downward pressures on prices. However, palm oil prices are likely to stay relatively firm on the back of several supportive factors:

a) The worldwide edible oils and fats market is tight. Despite prospects of improving palm and soyabean oil supply in the 2H of CY22 and some demand destruction, meaningful replenishment of present low inventories is more likely in CY23.

b) Inventories of sizeable palm oil users such as China along with possibly India and Pakistan are believed to be low. Moreover, China has yet to fully reopen its economy due to Covid-19, hence there is opportunity for demand to pick up.

c) Current high oil and gas prices suggest that demand for biofuels is likely to rise, helping to absorb supply and cushion any sharp fall in edible oils price.

We are maintaining SIMEPLANT’s average CPO price at RM4,000 per MT for FY22 and RM3,500 for FY23 but nudging up PK prices by 18% and 8%, respectively. However, we are increasingly doubtful that the arrival of new guest workers can adequately meet 2H CY22 peak harvesting needs. As such, we are toning down FFB output by approximately 5%, partly to reflect lower Malaysia production but also the poorer Indonesian harvest in 1QCY22.

Maintain MARKET PERFORM and TP of RM5.25. SIMEPLANT’s geographical spread is both a strength and weakness - strength in terms of risk diversification and exposure to wider openings but the scale and complexity of such an operation can be challenging if not sometimes complex. All in all, the Group offer defensive qualities such as land rich balance sheet and decent gearing, and is a beneficiary of food inflation as edible oils and fats prices have risen substantially compared to a year ago. A larger-than-expected dividend payout cannot be ruled out either for FY22. However, above average operating costs, weak ROEs and the “forced labour” issue raised by the US Customs and Border Protection agency, are some of the concerns preventing a stronger recommendation and higher target price for a group so prominent in the plantation sector. As such our TP is guided by 25% discount to broader market PER of 17-18x against FY22 CEPS.

Source: Kenanga Research - 23 May 2022