KEY INVESTMENT HIGHLIGHTS

• 2QFY20 normalised earnings came in at RM106.0m, mainly supported by the upstream segment

• Nonetheless, 1HFY20 normalised earnings of RM125m still falls short of our expectation

• Recovery in FFB production could be partially hampered by the lack of foreign worker

• RM475m raised in 1HFY20 following the group’s asset rationalisation exercise

• Maintain Neutral with a revised TP of RM4.89

Continuous uptrend in earnings recovery. Sime Darby Plantation Bhd’s (SDPL) 2QFY20 normalised earnings came in at RM106.0mm, a stark improvement as compared to 2QFY19 normalised loss of –RM25m. Note that the bulk of the exceptional items relates to the gains on land disposal amounting to RM197.0m. The optimism in the financial performance was mainly led by the upstream segment which made up for the lower contribution from the downstream segment. Nonetheless, the SDPL’s 1HFY20 financial performance still falls short of our expectation.

Upstream. The upstream segment reported 1HFY20 PBIT of RM604m, a significant improvement as compared to RM59m achieved for 1HFY19. This was mainly attributable to higher average CPO and PK prices (refer to Table 1). However, FFB production contracted by -7.0%yoy to 4.6m mt (refer to Table 2) from across all its operations.

Downstream. The downstream segment reported lower 1HFY20 PBIT of RM113m, a decline of -16.9%yoy. This was in view of weaker contributions from the bulk business which was affected by poorer refining margins as well as lower demand as countries went into lockdown in response to the pandemic. Note that the capacity utilisation rate went down to 64% as at 1HYF20 from 72% in 1HYF19. In addition, the sales volume also tumbled by -7.3%yoy to 1.0m mt. However, the differentiated businesses in Asia Pacific saw higher sales volume mainly from customised and business-to-customer product segment.

Asset monetisation exercise. In 1HFY20, the group has raised RM475m cash arising from the asset monetisation exercise. This has also led to higher cash balance of RM742m (+72.1%yoy) as opposed to RM431m as at 4QFY19. Moving forward, for FY20 and FY21, SDPL is expecting to rake in cash of more than RM1.5 arising from land sales as well as divestment of non-c0re, non-strategic asset, non-profitable assets, low yielding assets and adjacent investments.

Impact to earnings. We are revising FY20/21/22 earnings estimates to RM402.9m/RM556.7m/RM630.4m respectively as we are inputing higher production cost and lower contribution from the downstream segment

Source: MIDF Research - 28 Aug 2020