KEY INVESTMENT HIGHLIGHTS

• 3QFY20 normalised earnings came in at RM250m, mainly supported by higher CPO and PK prices

• Cumulative 9MFY20 normalised earnings amounted to RM273.0m, which is better than we have anticipated

• Future FFB growth could be impacted by labour shortage and unfavourable weather conditions

• On-going asset monetisation exercise could be hampered by the Covid-19 pandemic

• Maintain Neutral with a revised TP of RM5.08

Exceed expectations. Sime Darby Plantation Bhd’s (SDPL) 3QFY20 normalised earnings came in at RM250.0m. This represented a surge of almost fivefold from RM43.0m achieved in 3QFY19 which was mainly contributed by both the upstream and downstream segments. Cumulatively, 9MFY20 financial performance amounted to RM347.0m (+863.9%yoy). This came in better than our expectations, accounting for 73.2%yoy of full year FY20 earnings estimate.

Upstream. The upstream segment reported 3QFY20 PBIT of RM273.0m which was more than doubled as compared to RM76.0m achieved in 3QFY19. The improvement seen was mainly supported by higher average CPO price realised (refer to table 1). However, FFB production trended lower at 2.4m mt (-1.8%yoy), mainly caused by unfavourable weather and low productivity from older palms in Indonesia.

Downstream. The downstream segment reported lower 3QFY20 PBIT of RM71m, an increase of +4.4%yoy. This was mainly attributable to higher contributions from the bulk business in the Asia Pacific region which was driven by better profit margin. However, the segment earnings was partially impacted by the loss reported in its differentiated business amounting to -RM13m, as the Europe operations was affected by fair value losses on commodity contracts.

Impact to earnings. We are maintaining our revenue assumption at this juncture. However, we are revising upward the upstream contribution as we are inputting better-than-expected profit margin for the segment. Following our earnings adjustment, FY20-21 earnings have been revised upwards to between RM576.3m- RM907.5m.

Target price. Following our earnings adjustment, we are revising SDPL’s target price to RM5.08 (previously RM5.03). This is premised on pegging revised FY21 PBF of RM1.69 against unchanged target P/B ratio of 3.0x which is half standard deviation below the average ratio since its listing.

Maintain NEUTRAL. The disposal of the loss-making Liberian operation will improve the earnings capability of the group. Coupled with favourable CPO price, we expect significant improvement in the group’s earnings. However, we remain concern on possible impact to the group’s FFB production in view of the shortage of foreign labour as well as unfavourable weather pattern. This could potentially limit the benefit from higher palm prices. Meanwhile, we expect the downstream segment would continue to perform well, mainly driven by the bulk business segment. On another note, we expect the group’s asset monesation exercise could be face with some challenges in response to the Covid-19 pandemic. Nonetheless, any traction in the exercise would help to pare down the debt level to its target gross gearing ratio of 30% within the next three years and strengthen the balance sheet. All factors considered, we are maintaining our NEUTRAL recommendation on the group.

Source: MIDF Research - 24 Nov 2020