SIMEPLT’s 1HFY23 results beat our expectations but disappointed the market. Its 2QFY23 performance improved QoQ on better FFB output and stronger downstream margins. With easing cost prospects, we raise our FY23-24F net profit forecasts by 54-58%, but maintain our TP of RM3.65 (on 1.5x PBV) and UNDERPERFORM call as potential special dividends could be priced in already.

SIMEPLT’s 1HFY23 core net profit of RM338m (-72% YoY) beat our expectations at 67% of our full-year forecast but disappointed the market at only 32% of the full-year consensus. The variance against our forecast came largely from better output and easier costs.

Its 2QFY23 core net profit improved to RM258m (+227% QoQ, -38% YoY) as upstream EBIT improved QoQ to RM384m on better FFB output. Its better downstream margins also lifted EBIT QoQ but remained lower than a year ago on slower volume and tighter YoY margins. First half performance was generally weaker across upstream and downstream largely on softer palm oil prices and higher cost. Its adjusted 2QFY23 CNP was RM122m lower than reported NP mainly due to: (i) unrealised currency losses of RM51m, and (ii) unrealised commodity losses of RM18m which was offset by disposal gain of RM191m. Net gearing dipped further, from end-March 2023 of 35% to 40% in end-2QFY23 but if perpetual debt is included, net gearing rose QoQ from 49% to 53%. SIMEPLT declared an interim NDPS of 3.25 sen (-68% YoY) which is in line with our full-year expectation of 8.0 sen but lower than last year’s first half interim dividend of 10.0 sen. A higher NDPS is possible as SIMEPLT just completed the disposal of its Kapar estates to sister property company for RM618m with RM546m in gains.

Abating costs, firm selling prices. Global edible oil supply is improving but so is demand thus inventory levels, worldwide, are not rising significantly. Therefore, CPO prices are expected to stay firm, averaging around RM3,700 per MT for FY23-24. However, fertiliser and fuel costs have been weakening YoY which should translate to lower production cost moving into 2HFY23. Labour shortfall in Malaysia has largely been addressed so harvest should improve in the coming months. Altogether, CPO cost, whilst still high, should ease in 2HFY23.

Downstream demand remains a challenge. Unlike the stickier food and fuel driven demand for upstream CPO, the personal care, cosmetics and industrial markets for oleo-chemicals are proving more sensitive to ongoing economic slowdown. Coupled with tighter margins, weaker downstream contribution is likely for FY23. However, the commencement of another 140k MT p.a. of bio-diesel in Aug 2023 should lift FY24 downstream earnings a little.

Forecasts. We raise our FY23-24F net profit forecasts by 54-28% largely to reflect better harvest and lower costs ahead but maintain our TP of RM3.65 based on 1.5x FY24F P/BV vs. sector P/BV of 1-2x. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). We stay cautious on SIMEPLT’s elevated cost base which can drag long-term profits and returns. Maintain UNDERPERFORM. Some investors may want to consider a possible surprise dividend following its Kapar land sales but assuming FY23F’s NDPS is doubled, from 8 sen to 16 sen, the potential yields of 3.7% suggest such possible dividends might already be priced in.

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

Source: Kenanga Research - 24 Aug 2023