SIMEPLT’s FY22 results met our forecast but missed consensus. NDPS was also cut YoY. Realised average 4QFY22 CPO price, and FFB production softened both QoQ and YoY, while cost stayed high. Looking ahead, despite some decline in input costs, we expect continued pressures on margins as unit cost stays sticky while palm oil price eases YoY. Hence, we maintain our forecasts, TP of RM3.65 and UNDERPERFORM call.

SIMEPLT’s FY22 results met our forecast but missed consensus by 9%. FY22 net profit surged 10% YoY to RM2,488m but this was bolstered by RM291m from disposal gains. Adjusted core net profit actually slipped 12% YoY as upstream EBIT weakened to RM2,680m (- 13% YoY) despite better average CPO price of RM4,456 /MT (+20% YoY) as FFB production dipped 10% YoY to 8.207m MT due to labour constrains in Malaysia. However, better Asia Pacific bulk margin in 3QFY22 lifted overall FY22 downstream EBIT to RM859m (+57% YoY). 4QFY22 downstream margin was down sharply (-78% QoQ), offset by much stronger QoQ upstream EBIT, most probably on lower maintenance cost such as manuring compared to a quarter ago. Its net gearing eased from 36% as at end-Sept 2022 to 34% for end-FY22 and if perpetual debt is included, net gearing actually declined from 49% to 48% respectively.

Tough upstream comparatives ahead. After enjoying record palm oil prices in 2022, softer palm oil prices are expected for 2023 as edible oil supply improves. However, demand should also recover on the back of: (a) supportive post-Covid reopening momentum, (b) the world’s biggest edible oil market, China reopening, and (c) leading biodiesel markets (US, Indonesia and Brazil) poised for growth. All in all, CPO prices should soften over FY23-24 but stay firm at RM3,800/RM3,500 per MT (no change from previous assumptions) which are at the lower-end but within guidance of RM3,800-4,200 per MT for 2023. Our FY23-24F FFB growth of 13% and 8%, respectively, are also within guided range of 10%-15% or FY23F.

Downstream also faces headwind. Unlike the resilient upstream food and fuel-driven demand, downstream oleochemical is a manufacturing ingredient used in toiletries, cosmetics and more; hence, comparatively the demand for the latter can be vulnerable to an economic slowdown. Coupled with thinner margins, we are expecting weaker contribution from downstream segment over FY23-24. Nevertheless, SIMEPLT is opening a new RM80m 140K MT pa bio-diesel facility in Aug 2023 which should help earnings moving forward.

We maintain our FY23F net profit and introduce FY24F numbers. Likewise, NDPS for FY23 of 16.0 sen is left intact while FY24F NDPS is at 14.0 sen. Similarly, we keep our TP of RM3.65 based on 15x PER due to historical integrated peer rating. Higher unit costs from sub optimal output and elevated production costs are also expected to continue dampening margins. In part, FFB production is expected to stay subdued in Malaysia due to labour shortage, probably up to 2QFY23. On the guest workers front, the US Customs and Border Protection “forced labour” issue has been resolved. Hence, its ESG’s guest labour welfare rating has been raised from 2.5-star to 4.0-star but its overall ESG rating remains at 3-star, at sector average. Maintain UNDERPERFORM.

Risks to our call include: (i) weather impact on edible oil supply, (ii) unfavourable commodity price fluctuation, and (iii) high costs inflation.

Source: Kenanga Research - 20 Feb 2023