Kenanga Research & Investment

Sime Darby Plantation - Very Poor Start to FY23

Publish date: Thu, 25 May 2023, 10:07 AM

SIMEPLT’s 1QFY23 results made up <5% of both our and consensus full-year’s forecasts as high costs continued to erode margins. CPO price did weaken YoY but remained flat QoQ. FFB  production also eased QoQ and YoY but the key issue remains high costs due to low productivity. Cost pressure should ease by 2HFY23 but not significant enough to avoid a material downgrade of 70% and 62% for FY23-24F CNP forecasts. We maintain our TP  of RM3.65 which already translates to 1.5x P/BV, and UNDERPERFORM rating.

SIMEPLT’s 1QFY23 CNP of RM79m (-85% QoQ, -90% YoY) came in  at just under 5% of both our and consensus full-year forecasts. The disappointing earnings was due to much higher costs as the Malaysian operations continued to suffer low productivity which ate into upstream margins while downstream earnings also saw softer volume. Plantation  EBIT of RM220m (-69% QoQ, -75% YoY) was dampened by (a) easier  CPO price of RM3,887 per MT (-3% QoQ, -13% YoY) coupled with (b)  poorer FFB harvest of 1.824m MT (-12% QoQ, -5% YoY) but also (c)  much higher costs due to slower pick-up in productivity among the newly arrived workers in their Malaysian estates. Downstream contribution fell, QoQ and YoY, on slower volume but also as the corresponding prior quarter was exceptionally good. Adjusted 1QFY23  CNP of RM10m is higher than reported NP due largely to (a) unrealised currency gain of RM23m offset largely by (b) unrealised loss on commodity contracts of RM33m. Net gearing inched up from end-FY22 of 34% to 35% in end-1QFY23. Including perpetual debt, net gearing rose QoQ from 48% to 49%.

Upstream costs to abate but staying high. After record prices in  2022, softer palm oil prices are expected for 2023. Edible oil supply is improving but demand is also recovering on: (a) buyers rebuilding inventories, (b) post-Covid reopening momentum in China, and (c) firm biofuel demand, notably from the US and Indonesia but also Brazil.  Therefore, softer YoY CPO prices are expected over FY23-24 but staying firm at RM3,800 per MT. Meanwhile, fertiliser and fuel costs are easing while FFB output should improve 13% in FY23 followed by 8% in FY24F. Although 1QFY23 harvest was soft, SIMEPLT is expected to address much of its labour shortfall in Malaysia before the 2HFY23  peak harvesting season. Management expect overall CPO cost to increase YoY from RM2,350 per MT in FY22 to RM2,700 for FY23.

Downstream demand remains a challenge. Unlike the more inelastic demand for upstream food (and fuel), downstream oleo-chemical demand is expected to suffer more from an economic slowdown as its markets are more in personal care, toiletries and industries. Coupled with thinner margins, weaker downstream contribution is expected over  FY23 while an additional 140k MT p.a. of bio-diesel capacity (commencing Aug 2023) should support downstream earnings in FY24  to a certain extent.

Maintain UNDERPERFORM and TP of RM3.65 which already translates to 1.5x P/BV (sector historic P/BV range is 1-2x) despite our downgrade of FY23-24F CNP by 70% and 62%, respectively. Lower productivity coupled with rising costs has led to 1QFY23 losses in the  Malaysia upstream operation. This scenario should improve moving ahead as more workers arrive and gained experience but 2QFY23 is likely to stay challenging. SIMEPLNT ESG rating of 3-star is at the sector’s average.

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 - 25 May 2023

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