KEY INVESTMENT HIGHLIGHTS

• 1QFY20 normalised earnings surged to RM243m, mainly premised on the strong recovery in average CPO price

• However, the coming quarters could record lower earnings as the average CPO price trends lower

• The easing of average CPO price could be partially made up by the expectancy of higher FFB production

• Healthier debt position as the group carry on with its asset monetisation exercise

• Maintain Neutral with a revised TP of RM5.19

Strong recovery in earnings. Sime Darby Plantation Bhd’s (SDPL) 1QFY20 normalised earnings came in at RM243m, a stark improvement as compared to 1QFY19 normalised earnings of RM39m. Note that the bulk of the exceptional items relates to the gains on land disposal. The optimism in the financial performance was mainly led by the upstream segment. All in, the SDPL’s 1QFY20 normalised earnings came in within ours but above consensus expectations, accounting for 27.6% and 33.1% of full year FY20 earnings estimates respectively.

Upstream. The upstream segment reported 1QFY20 PBIT of RM288m, a surge of more than +100%yoy. This was mainly attributable to higher average of crude palm oil (CPO) and palm kernel (PK) prices (refer to Table 1) as well as increase in oil extraction rate (OER) (refer to Table 3). However, the fresh fruit bunches (FFB) production declined by -16%yoy, mainly impacted by the contraction in FFB production in Malaysia to 1,074k mt (refer to Table 2). Note that we expect the upstream segment’s earnings to trend lower in the coming quarters in view of lower CPO price in comparison to 1QFY20 average of RM2,605/mt. Nonetheless, this would be partially buffered by expectancy of higher FFB production.

Downstream. The downstream segment reported 1QFY20 PBIT of RM89m (+4.7%yoy) which was mainly due to improved performance from the differentiated businesses. This, however, was partially offset by weaker performance from the trading and bulk operations in view of lower demand from China and India.

Asset monetisation exercise. In 1QFY20, the group has raised RM279m cash arising from the asset monetisation exercise. This has also led to higher cash balance of RM714m (vs 4QFY19: RM431m). Moving forward, for FY20 and FY21, SDPL is expecting to rake in cash of more than RM1.5b arising from land sales as well as divestment of non-core and non-strategic assets, non-profitable assets, low yielding assets and adjacent investments.

Impact to earnings. We are revising our FY20/21/22 CPO price forecast to RM2,300/2,450/2,550 respectively. This led to revision in FY20/21/22 earnings to RM766.0m/880.4m/927.6m respectively.

Target price. We are rolling forward our valuation base year to FY21 and derive a new target price of RM5.19 (previously RM4.93). This is premised on pegging revised FY21 PBF of RM1.73 against target P/B ratio of 3.0x which is half standard deviation below the average ratio since its listing.

Source: MIDF Research - 27 May 2020