INVESTMENT HIGHLIGHTS

• Pure plantation company post demerger

• Aims to improve efficiency by achieving “Mission 25:25”

• Expect FY18 core earnings of RM1.17b

• Net gearing should improve in FY18 and FY19

• Initiate with NEUTRAL call and TP of RM5.60

Pure plantation company post demerger. As a result of the completion of Sime Darby Berhad Pure Play, Sime Darby Plantation Berhad (SIMEPLT) earnings is now 99% exposed to Oil Palm related activity. In FY17, Upstream plantation contributed 94% of the Group’s operating profit and this is followed by Downstream’s 5%. SIMEPLT is also the world’s largest oil palm plantation company (by planted area) with 602,454 ha of planted areas.

Aims to improve efficiency by achieving “Mission 25:25”. Under its “Mission 25:25”, SIMEPLT aims to achieve Fresh Fruit Bunch (FFB) yields of 25 MT per Ha and 25% Oil Extraction Rate (OER) by the year 2025. For the Downstream segment, SIMEPLT aims to improve its operating profit contribution to 20% of the Group’s within the next 5 years (as compared to FY17’s 5.1%).

Expect FY18 core earnings of RM1.17b. Key assumptions are average CPO price of RM2863 per tonne and FFB volume of 10.13m tonnes. For FY19, we core net profit forecast is RM1.21b assuming average CPO price of RM2900 per tonne and FFB volume of 10.28m tonnes.

Net gearing should improve in FY18 and FY19. We expect SIMEPLT net gearing to decline to 0.40x by end-FY18 and 0.33x by endFY19. As of end-FY17, the net gearing is at 0.48x. The decline in net gearing is mainly caused by the strong operating cash flow from its plantation business. We expect SIMEPLT to be in a comfortable position to achieve its 50% dividend policy which will translate to dividends of 8.57 sen in FY18 and 8.89 sen for FY19.

Initiate coverage with a NEUTRAL recommendation and a Target Price of RM5.60. Our Target Price is based on the average Target Price derived from Price To Earnings (PE) and Price To Book (PB) methodology. By using the PE methodology, we derive the Target Price of RM4.71 by applying 26.5x Target PE on FY19 EPS estimate of 17.78 sen. By using the PB methodology, we derive the Target Price of RM6.48 by applying 3.0x Target PB on SIMEPLT Book Value of RM2.16. Refer Page 7 for the details of the valuation.

Source: MIDF Research - 29 Nov 2017