KEY INVESTMENT HIGHLIGHTS

• 3QFY19 normalised earnings of RM21m was mainly supported by the downstream segment

• The upstream segment was badly affected by the weak CPO and PK prices

• Expect sequential improvement in 4QFY19 earnings to be muted due to the groups committed forward sales

• Asset monetisation exercise underway, with potential cash inflow of more than one billion Ringgit in FY20

• Maintain Sell with an unchanged TP of RM4.08

Another weak quarter. Sime Darby Plantation Bhd’s (SDPL) 3QFY19 reported loss -RM243m. After excluding exceptional items which consist of impairment charge on assets in Liberia of RM256m and impairment of investment on the joint ventures of MyBiomass of RM8m, the normalised earnings plunged by -81.7%yoy to RM21m. This was mainly attributable to weaker CPO and PK realised prices. Note that the group’s profitability was supported mainly by the downstream segment.

In-line with our expectations. Cumulatively, SDPL’s 9MFY19 normalised earnings amounted to RM122m, a declined of -69.0%yoy. This came in within ours but below consensus expectations, accounting for 84.8% and 39.5% of full year FY19 earnings estimates respectively. Despite recovery in CPO and PK was observed since late October 2019, we do not expect much earnings growth for 4QFY19 on a sequential basis. This is in view of the group’s committed forward sales.

Upstream. The average CPO prices realised for the group declined by - 14% to RM2,006/mt. Lower CPO prices were recorded across the group’s operations namely Malaysia (-15%yoy), Indonesia (-6%), PNB/SI (-18%) and Liberia (-7%yoy) (refer to table 1). Meanwhile, 9MFY19 FFB production contracted marginally by -%yoy to 7.4m mt. Note that lower FFB production from Indonesia, PNG/SI and Liberia offset the improvement in FFB production stemming from Malaysia (refer to table 2). On another note, the group’s OER stayed relatively flat at 21.51 (+0.44ppts).

Asset monetisation exercise. For FY19, SDPL is expected to rake in RM152m from this exercise. The bulk of the cash inflow mainly stemmed from the disposal of the entire stake in the loss-making PT Mitra Austral Sejahtera (RM103m) and entire 51% stake in Golden Hope-NHA Be Edible Oils Company (RM45m). For FY20, more than one billion Ringgit cash proceeds is expected from the asset monetisation exercise, primarily derived from sale of land in Malaysia and divestment of noncore assets and investments. The proceeds will be used to pare down its borrowings, primarily the short term borrowings which currently stands at RM6,061m.

Impact to earnings. We are keeping our FY19 and FY20 earnings estimates at this juncture.

Target price. We are maintaining our our target price of RM4.08. This is premised on pegging FY20 PBF of RM1.57 against target P/B ratio of 2.6x which is the average ratio since its listing.

Maintain SELL. The impact of weak CPO and PK prices reverberated throughout the entire upstream segment. This was made worse by the contraction in overall FFB production, primarily from outside Malaysia. Also, since the group has made some commitment in forward sales, we do not much expect much recovery in upcoming quarterly earnings subsequent to the recent recovery in CPO price. While the downstream segment performs relatively well, it is insufficient to make up for the underperformance from the upstream segment. We understand the group is focusing on growing the downstream segment to partially made up for the volatile upstream contribution. However, we expect the strategy will not materialise in the foreseeable term. On another note, we view that dividend yield to remain unattractive as compared to its peers. The proceeds from the asset monetisation exercise is expected to be use to pare down the borrowings, especially the short term borrowings. As we do not see foresee much optimism surrounding the group, we are maintaining our SELL recommendation.

Source: MIDF Research - 2 Dec 2019