SIMEPLNT is divesting two Indonesian subsidiaries as part of a legal dispute settlement which dates back to 2008. Therefore, the selling price seems muted compared to market norms. Nevertheless, a disposal gain is still expected upon conclusion around end-FY23. We maintain FY23F CEPS but tone down FY24F CEPS by 7% due to the loss of their contribution. Maintain UNDERPERFORM and TP of RM3.65 as margins are still likely to be constrained by high costs for another quarter or two.

Lower FY24F earnings from the divestment. SIMEPLNT entered into two conditional agreements to divest two Indonesian oil palm subsidiaries for IDR1,750bn (RM518m). Both units were involved in a longstanding legal dispute involving multiple suits and appeals. Importantly, the disposal should resolve the issue when concluded sometime towards the end of FY23. As such, we expect minimal impact on FY23F core net profit, though reported net profit will include a gain of RM107m. However, FY24F CNP is revised lower due to lower plantation contribution following the divestment though mitigated by lower interest charges as the bulk of the proceeds are expected to be used to reduce working capital borrowings.

Operationally, CPO price should stay firm over FY23-24. We are expecting CPO price to average RM3,800 per MT for FY23-24. Although Brazil looks set to end the current soyabean season with record harvest, very poor Argentinean harvest is weighing down on the overall surplus from Latin America. Meanwhile, US soya planting surveys are also suggesting flattish YoY change in planting area as farmers are wary of competing with the Brazilian exports. Even with a 5% larger soya planting in the US for 2023, the overall recovery in edible oil supply is likely to stay fragile for 2023 with the likelihood that below-average inventory levels will extend into 2024.

High cost could stay sticky for another quarter or two. Except for the price of rock phosphate (phosphorus) which is still rising, the prices of other key components of synthetic fertiliser (namely nitrogen and potash), have fallen sharply to about 20-40% below the 2022 levels and some are approaching the prices recorded in 2021. Likewise, crude oil prices have also eased YoY but in both cases, prices of crude oil and fertiliser are about double levels in 2020. Meanwhile, the cost of labour is set to continue rising in view of inflationary pressures. SIMEPLNT will also need, up till middle of the year, to run down its more expensive inventory of fertilizer before replenishing with cheaper orders. Labour shortfall in Malaysia is improving but the group’s output may still be affected till middle of 2023, causing unit production cost to stay high.

Forecasts. FY23F NP is revised up to reflect gain from the disposal, expected to conclude in 4QFY23. FY23F CNP and hence CEPS are maintained while F24F CEPS is toned down by 7% due to the lower plantation contribution from Indonesia following the divestment.

Maintain UNDERPERFORM and TP of RM3.65. SIMEPLNT offers defensive land-rich NTA, improving gearing with firm CPO prices stabilising. However, SIMEPLNT looks expensive for the moment, trading at premium to integrated peer and 17% above our TP of RM3.65 derived from 15x FY23F CEPS with no ESG premium in view of its average 3-star scoring.

Risks to our call include: (i) weather impact on edible oil supply, (ii) favourable commodity prices fluctuations, and (iii) easing of cost inflation.

Source: Kenanga Research - 17 Apr 2023