1HFY22 Core Net Profit (CNP) of RM1,354m came in below our and consensus expectations as the Group guided towards a softer production outlook. Nevertheless, 1HFY22 YoY performance is still good, accounting for 54% of our FY22F CNP thanks to firm CPO prices. However, we are toning down FY22F and FY23F Core EPS (CEPS) by 11% and 5%, respectively, on lower production coupled with easier CPO prices. We are trimming our TP from RM5.25 to RM4.40 but keeping our MARKET PERFORM call intact.

1HFY22 CNP saw decent Upstream EBIT of RM1,733m (+20% YoY), underpinned by robust average CPO price of RM4,868 (+41% YoY). However, earnings were dampened by lower FFB output of 4.00m MT (-15% YoY), due notably to poorer production by its Malaysian operations. Nevertheless, it is worth noting that the Group typically enjoy better FFB harvest in 2Q thanks to its Papua New Guinea operation which peaks then as it is located in the southern hemisphere. No surprise then that 2QFY22 production rose 9% QoQ to 2.074m MT but was 16% weaker YoY. Consequently, 1HFY22 harvest fell 15% YoY to 3.98m MT, affected mainly by labour shortages in Peninsular Malaysia and Sarawak which made up 40% of the Group’s operating area. Downstream EBIT of RM375m (+48% YoY) was robust thanks to a recovery in 2QFY22 margins. For 1HFY22, the Group announced an interim NDPS of 10.0 sen (+27% YoY), in line with our FY22F NDPS of 21.0 sen. However, net gearing inched up from 37% in March 2022 to 39% in June 2022 due to higher working capital requirements.

Moving forward, with palm oil prices having declined by >30% since June and seasonal production uptrend in Malaysia likely capped by ongoing labour constraints, a weaker 2HFY22F earnings is anticipated for the Group. However, FY22F/FY23F Upstream EBITs are still expected to stay resilient on healthy CPO prices despite the recent price weakness. The tight edible oils and fats market is likely to ease only in 2023 and the recovery looks fragile as the market may potentially stay tight if demand, for example, exceeds 3-4% YoY growth in 2023. YTD, demand, which has been affected by Covid-19 since 2020, has yet to fully normalise. Chinese imports, for example, have been subdued thus far while India is still rebuilding its inventory level. All in all, we expect demand to gather pace as 2023 approaches. Some key buyers need to replenish their inventories, prices are also more attractive now and elevated fossil fuel prices are creating latent demand for biofuels. Downstream business should also enjoy decent margins on easing raw material costs which help to offset higher energy and transportation costs.

We are keeping SIMEPLANT’s average CPO price at RM4,000/MT for FY22F and RM3,500 for FY23F but nudging down FFB output by 5% to 8.0m MT for FY22F, our second production downgrade in three months. Our earlier doubts that new guest workers will not arrive on time to catch the Malaysian peak harvesting months has been confirmed by the Group.

Maintain MARKET PERFORM but downgrading our TP from RM5.25 to RM4.40 as we replace FY22F CEPS with FY23F’s. Despite labour shortages affecting its Malaysian estates, the impact is at least softened by the Group’s more geographically diversified operations. The Group’s other defensive qualities include a land-rich NTA, decent gearing with healthy margins and cashflow still expected as CPO prices should stay firm in FY23. A larger-than-expected dividend payout cannot be ruled out either for FY22.

However, above average operating costs, weak ROEs and ESG concerns raised by the US Customs and Border Protection agency on “forced labour” are some of the concerns preventing a target PER above peers’ average of 15x or a stronger recommendation.

Source: Kenanga Research - 24 Aug 2022