INVESTMENT HIGHLIGHTS

• SDPL is disposing its loss-making plantation assets, PT MAS, in Indonesia for RM123.1m

• The disposal is part of the group’s asset monetisation exercise which aim to raise RM1.0b

• The proceeds would be channeled to reduce its borrowings and/or acquire brownfield assets

• Minimal impact to balance sheet and earnings

• Maintain NEUTRAL with an unchanged TP of RM4.50

Disposal of PT MAS. Sime Darby Plantation Bhd’s (SDPL) is disposing its entire stake in PT Mitra Austral Sejahtera (PT MAS) to PT Inti Nusa Sejahtera (PT INS) for USD29.7m (RM123.1m). PT MAs is principally engaged in the cultivation of oil palm and processing of crude palm oil and palm kernel. It owns 7,074.04ha of land planted with oil palm in Kabupaten Sanggau, Kalimantan Barat, Indonesia. Comparatively, the group has over 603k ha of land planted with oil palm.

View. The news does not come as a surprise. Previously, the group mentioned that it target to raise RM1.0b this fiscal from asset monetisation exercise. The proceeds will be used for paring the group’s net gearing level and acquisition of brownfield plantations. We are neutral on the disposal given that the impact to balance sheet and earnings is minimal. Nonetheless, the disposal will bring the group closer to its targeted asset monetisation exercise.

Impact. The group’s 1QFY19 total borrowings and net gearing ratio stands at RM7.5b and 43.2% respectively. Assuming the entire proceeds from the disposal will be use to pare down the borrowings, the net gearing ratio will improve slightly to 42.5%. Meanwhile, PT MAS has accumulated loss of RM300m since its inception in 1996. For FY18, we understand that the loss incurred is very minimal. Thus, the disposal would not have notable impact on the group’s earnings.

Target price. We are maintaining our target price of RM4.50. This is premised on FY20 PBV of RM1.73 against target P/B ratio of 2.6x which is the average P/B ratio since its listing.

Maintain Neutral. We favour SDPL’s strong management team for both the upstream and downstream segments. Both FFB production and OER has shown commendable improvement. Meanwhile, the downstream segment also showed better operational efficiencies. Coupled with the favourable trading environment, which include favourable import duties in India and zero export levies in Indonesia, the downstream segment’s PBIT margin has been expanding. However, the weak CPO and PK prices have overshadowed the positive effort of the group. In addition, while the group has generous dividend policy of at least 50% of PATAMI, the expectancy of subdued earnings prospect will limit the dividend payout. Base on existing earnings outlook, we expect the dividend yield to come in below two percent. All factors considered, we are maintaining our NEUTRAL recommendation on SDPL.

Source: MIDF Research - 27 Jun 2019