SDG's 9MFY24 results met consensus but were a tad above Kenanga's expectations despite a weak third quarter. 3QFY24 core net profit fell QoQ and flat YoY as better upstream performance was dragged down by poorer downstream results. We are adjusting up FY24-25F core net profits by 6-9%, respectively, but maintain our PBV-driven TP of RM4.60 and our MARKET PERFORM call.

9MFY24. After adjusting for net disposal gain of RM356m, unrealised foreign exchange gain of RM18m and net fair value gain of RM2m, 9MFY24 core net profit (CNP) rose 49% YoY to RM1,016m to account for 77% and 73% of Kenanga's and consensus respective full-year estimates. Underpinning the stronger CNP for 9MFY24 is better core upstream earnings. Although reported upstream earnings dipped 16% YoY to RM1,698m, core upstream earnings improved 26% YoY on higher FFB harvest (+2% YoY), CPO price (+4%) and PK price (+25%).

3QFY24 CNP fell 12% QoQ to RM350m due to higher tax charge (up QoQ from 23% in 2Q to 27%) but stayed flat YoY. 3QFY24 saw better PK price and FFB harvest on both QoQ and YoY basis while CPO price was mixed but held firm generally (-2% QoQ, +5% YoY) to help lift core upstream PBT by 57% QoQ and 9% YoY. Margins also improved thanks to softer fertiliser, energy and agri-chemical costs while a firmer MYR also helped imported inputs. Downstream PBT disappointed QoQ and YoY due to weaker margins and European demand.

Outlook: Healthy upstream to support prospective earnings.

Global edible oil demand is growing faster than supply in CY24 and a similar scenario looks likely in CY25 as well. With such supportive pricing environment underpinning edible oil prices, CPO prices should stay robust as well.

• Upstream CPO prices are expected to average around RM4,000 per MT over FY24-25 while fertiliser, fuel and chemical costs are likely to remain soft. FFB output thus far in FY24 had been lower-than- expected due to poorer yields in parts of Indonesia but this should recover come FY25, helping to offset higher wages in Malaysia then.
• Downstream demand from Asia and Europe is expected to stay muted but to be on the mend for 4Q and FY25, thanks to ongoing economic fiscal loosening in US, Europe and China. However, margins are still likely to stay competitive for the rest of FY24 and FY25.
• Property developments on the horizon. Within the past six months, SDG has announced three property initiatives namely: (i) 1,000-acre Kerian Integrated Green Industrial Park (KIGIP) and solar farm venture with parent PNB in May 2024, (ii) a collaboration with TH Property to extend "techpark@enstek" near KLIA involving 464 acres in Aug 2024, and (iii) an MOU with AME Elite Consortium Bhd (Non- Rated), earlier this month, to develop 641 acres of green industrial park in Kulai which is part of "Greater JB." We expect property earnings to start trickling in from FY26 onwards.

Forecasts. FY24-25 core net profit forecasts are raised by 6% and 9%, respectively, to reflect firmer upstream performance after fine tuning CPO price higher by 2% and cost lower by 2%-3%.

Valuations. We are keeping our TP intact at RM4.60 based on 1.6x PBV which is at 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. Ongoing efforts to raise return are thus positively viewed but execution risks remain and meaningful contribution to the bottom line takes 2-3 years. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

Investment case. 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 palm kernel prices, and (iv) cost inflation particularly fertilisers.

Source: Kenanga Research - 21 Nov 2024