Sime Darby Plantation released its fourth quarter results yesterday, swinging back into the black for both its fourth quarter and FY20 net profit and tracking ahead of Macquarie Equities Research’s (MQ Research) estimates. Read more for an excerpt of MQ Research’s report (19 Feb).

The shares rose 1.0% to RM4.95 yesterday. Investors who are keen to gain leveraged exposure to this counter may consider call warrant SIMEPLT-CU, which has an exercise price of RM6.00 and the lowest exercise ratio of 3.0 warrants per share.

Event

• MQ Research maintains its Outperform rating on Sime Darby Plantation (Sime Plant) following the FY20 results release. FY20 adj. profit after tax (PAT) registered at RM892mn (+1264% year-on-year (YoY)) tracking ahead of MQ estimates at 113% but largely in line with consensus at 92%. Revenue registered at RM13.1bn (+8% YoY) tracking in line with MQ Research and consensus estimates at 94% and 97%, respectively. At the operating level, results were in line with MQ Research’s estimates – however at adj. PAT level, the reported figure was ahead due to MQ Research’s higher tax assumptions.

Impact

• Plantations: benefitted from cost cuts and exit from Liberia. The division reported FY20 earnings before interest and tax (EBIT) of RM1.2bn (+882% YoY) despite seeing revenue sliding to RM2.2bn (-13% YoY) and crude palm oil (CPO) production dipped by 4% YoY to 1.99mn mt. Higher CPO price recorded across the group at RM2,532/mt (+23% YoY), exit of Liberia and other cost cutting measures had driven the stronger performance in FY20. The group has also managed to trim its gross debt by RM1bn to RM6.7bn in FY20, as part of Sime Plant’s 5-year key performance index (KPI) improvement. As at FY20, Sime Plant’s net gearing stood at 47% vs. 55% last year.
• Downstream: higher average selling prices (ASP) offset lower sales volume and capacity utilisation. The division reported a total revenue of RM10.8bn (+14% YoY) with EBIT of RM386mn (+40% YoY) on the back of higher ASP and stronger margins. Similar situation was seen in KLK, whereby operations in Europe are have contributed largely to the strong downstream performance. Sime Plant had managed to secure higher ASP (i.e. higher margins) and cut its cost across the downstream segment to achieve the results above. The stronger margins had managed to offset the impact of lower sales volume (-2% YoY) and lower capacity utilisation rate (-11 ppts YoY).
• US CBP investigations will take a while to resolve, no systemic risk across the clientele. Since the ban on Sime Plant’s CPO imports (from Malaysia) into the US were banned by the US Customs and Border Protection (CBP) back in Dec ’20, Sime Plant had identified the independent third party human rights agent to assess its Malaysian operations. Sime Plant believes the process will take 6-12 months as it looks to cast a wider net on the assessment to avoid the same incident from happening in the future. Sans US clients, MQ Research believes the clientele for Sime Plant is sticky, as such the clients will give it time to resolve the issues and maintain Sime Plant as their supplier.

Action and Recommendation

• Outperform rating reiterated.

12-month Target Price Methodology

• SDPL MK: RM6.00 based on a discounted cash flow (DCF) methodology
• KLK MK: RM27.00 based on a DCF methodology

Source: Macquarie Research - 19 Feb 2021