SDG in its 1HFY24 briefing guided investors to expect more industrial park co-developments along with a renewable energy (RE) push whilst keeping plantation as its core. Outlook for upstream should stay firm for FY24 on better FFB output and easier costs while downstream margins are buoyed by European demand for sustainable palm products. Core net profit forecasts have been raised in our earlier report for FY24-25, and we will account for land disposals pending completion as non-core. All said, TP of RM4.20 and our MARKET PERFORM call are maintained.

We came away from SDG’s 1HFY24 results briefing with the following key takeaways:

1. Upstream - FY24 earnings should stay healthy on firm CPO price, better FFB harvest and easier cost. Average CPO prices of RM3,800/MT are still expected by us for FY24-25. YoY improvement in FFB output should moderate moving into 2H; the strong 1H print was against a weak Malaysian comparative base. Lower Indonesian harvest in 1H due to El Nino is expected to persist into 2H, as would be the sporadic security issues preventing access to about 5,000 Ha in PNG affecting 1H production although heavy downs pours in 1H are starting to ease there. Production cost to ease due to lower fuel and fertiliser costs and better PK prices.

2. Downstream – better margins. European demand for stricter sustainable edible oil products is translating into better margins as SDG is among the few who can meet the pending EU Deforestation Regulation (EUDR) conditions. Consequently, margins have been robust and should stay so for 6-12 months. Asian demand should also stay encouraging but on much tighter margins.

3. Industrial properties – also looking at Kulai. Instead of selling well located estates to real estate developers (a few such disposals by SDG are still pending completion in 2H), SDG has opted to co- develop industrial parks with partners. Its first such project, the Kerian Integrated Green Technology Park (KIGIP) was announced in May involving a 660-acre solar farm to supply electricity to an adjacent 340-acre industrial park in Kerian, north Perak. Two days ago, SDG signed an MOU with TH Properties to co-develop a 464- acre halal food hub by the latter’s Enstek development in Negeri Sembilan (bordering Selangor). As Enstek is quite matured, some contribution is expected as soon as FY25. KIGIP will take longer as its feasibility is still being studied. Another project in Kulai, Johor is also being considered but no detail has been announced yet.

4. RE gameplan. SDG indicated it has enough less productive agriculture land (c.1,200 Ha) to support up to 1GW of solar installation. Thus far, it has only leased out to solar farm operators. Work on its own 15MW CGPT solar farm has started and is due to start contributing in 2HFY25. Bids are also underway for LSS5 while the KIGIP project is being studied.

Forecasts. No change to core FY24-25F forecasts.

Maintain MARKET PERFORM and TP of RM4.20 based on 1.6x PBV, a discount to average 2x for large integrated peer due to SDG’s lower 5-year average ROE of 8% vs. 10% of its peers. SDG’s efforts to improve return is a positive but actual contribution to the bottom line will take time (2-3 years or beyond) and face execution risks. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3)

With some of its estates ripe for property development, SDG is defensive and undervalued from an asset point of view but long-term expansion plans and productivity management strategies would be viewed positively though the timing and actual impact on earnings are less clear; hence, we are keeping our MARKET PERFORM call.

Risks to our call include: (i) Western hostility towards palm oil on sustainability and bio-diversity issues; (ii) impact of weather and labour shortages on production, (iii) weak CPO and PK prices, and (iv) cost inflation particularly fertilisers.

Source: Kenanga Research - 23 Aug 2024