SIMEPLT has concluded the sales of two Indonesian plantation subsidiaries, a divesture that is part of a settlement over a legal dispute dating back to 2008 hence the muted selling price. Nonetheless, the conclusion should result in a net gain of RM107m and the possibility of a more generous-than-expected dividend payout in FY23F. However, CEPS is still expected to stay under pressure hence we are maintaining our FY23─24F CEPS, TP of RM3.65 and UNDERPERFORM.

A closure to a long legal dispute. On 14 April this year, SIMEPLT agreed to divest two Indonesian oil palm subsidiaries for IDR1,750b (RM518m) as part of a settlement agreement with PT Asa Karya Multi Pratama (buyer-cum-plaintiff). The buyer-cum-plaintiff had earlier filed a suit against SIMEPLT, claiming correspondences between the two parties had established a sale-and-purchase obligation at a price of RM488m. Subsequent to 14 April 2023, the Central Jakarta District Court on 22 June 2023 heard the case involving the recent agreement and on 21 July 2023 pronounced that both parties are obliged to adhere to the settlement agreement the parties had entered into in April 2023. SIMPLNT will thus receive RM518m with an estimated disposal gain of RM107m and the resolution of a longstanding legal dispute. No change of our forecasts as we had adjusted our earnings for the settlement back in April 2023 with a slightly lower plantation contribution but also lower interest charges as some of the proceeds will help pare working capital borrowings. However, with the conclusion of the sale, higher dividend should not be ruled out hence our upward revision for NDPS in FY23F from 5.0 sen to 8.0 sen but FY24F NDPS is maintained at 5.0 sen.

CPO price to stay firm over FY23─24F with possible further upside from El Nino. Average CPO price of RM3,700 per MT is expected for FY23─24F on tight supply. Although global edible oil supply is improving YoY, so is demand thus inventory is likely to stay fragile into FY24. Compound this with a pending El Nino due end-2023 or early 2024, the risk of a supply downgrade come 2024 is higher today than it was six months ago. A serious El Nino can drag down oil palm yield.

Cost should ease from 2H 2023 onwards. While the cost of labour is set to continue rising in Malaysia and Indonesia, overall cost pressure on the sector should ease in 2H 2023 on: (a) lower fertiliser prices, (b) softer energy cost, and (c) seasonally, harvest often peaks in the second half thus helping to better spread unit cost out.

Forecasts. Maintained FY23─24F CNP but raising FY23F NDPS from 5.0 sen to 8.0 sen on the assumption that SIMEPLT pays out about half of the proceed as dividend. FY24F NDPS is kept intact though at 5.0 sen.

Maintain UNDERPERFORM and TP of RM3.65. SIMEPLNT offers defensive land-rich NTA, improving gearing with firm CPO prices stabilising. However, SIMEPLT looks expensive for now, trading at a premium to integrated peers and 24% 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 - 24 Jul 2023