• Maintain NEUTRAL, with new MYR5.05 TP from MYR5.30, 3% downside. Sime Darby Plantation’s 1Q22 core earnings were slightly above at 29-30% of FY22F, due mainly to higher ASPs. Although earnings will be stronger in 2022, we believe valuation is fair, while unresolved ESG issues will keep valuation below its historical average. SDPL is trading at 15.6x 2023F P/E, in line with its peers of 15-17x 2023F.

• More forward sales for 2022. SDPL has locked in more forward sales for its West Malaysian production (50% of 2022 output), at c.MYR4,700/tonne. CPO price achieved in 1Q22 was MYR4,465/tonne, below the Malaysian Palm Oil Board (MPOB) price of MYR6,183/tonne, as lower Malaysian and Indonesian prices were offset by stronger Papua New Guinea (PNG) ASP.

• 1QFY22 FFB fell 13.5% YoY, dragged down by Malaysia (-16%) and Indonesia (-19%). SDPL is revising its guidance for FY22 to 0 to -5% from a single-digit growth, given the continued labour shortage situation. SDPL is hoping for foreign workers to start coming in by June/July. The shortage has worsened to 32% from 25% last quarter. We reduce our FY22F-24F FFB growth to 0-4% (from 3-5%).

• 1Q22F unit costs rose 27% YoY to MYR2,300/tonne (blended), due to higher fertiliser costs and lower output. For FY22F, SDPL has tendered for all of its fertiliser requirements at prices 50% higher YoY, while higher minimum wages will add another 2-3% rise in unit costs. Nevertheless, SDPL is guiding for unit costs to rise about 7-8% in FY22F to MYR2,000/tonne, as production is expected to improve in the coming quarters. We are more conservative and project costs to rise 15-20% YoY.

• Downstream margin was slightly lower in 1Q22 (at 3.3%) vs 3.5% in 1Q21 and 3.4% in 4Q21. SDPL believes margin should improve in the coming quarters, as the export ban in Indonesia has been lifted, and as the company unloads its excess inventory. At end 1Q22, inventory has risen to is 392k tonnes (from 324k tonnes end-Dec) and this is likely to have risen further in 2Q due to the ban. SDPL believes that the effects of the ban will only wear off by end-2Q, as inventory levels in Indonesia are high.

• SDPL will start engagement with the US Custom and Border Patrol on its submitted Impactt report this week, and will only release the report upon completion of the process and upon modification of the findings.

• We raise our CPO prices to MYR5,300 (from MYR4,300) for FY22F and to MYR4,300 (from MYR3,600) for FY23F. As such, FY22F-23F earnings are raised 15-18%, while our FY24F is relatively unchanged.

• Our SOP-derived TP is revised down to MYR5.05 (from MYR5.30), based on rolled forward unchanged P/E targets of 18x 2023F for the plantation division, and 12x for the downstream division. Our TP includes an ESG discount of 12%, to account for SDPL’s ESG score of 2.4.

• Risks include policy changes in Indonesia and changes in supply and demand dynamics for PO, amongst others.

Source: RHB Research - 23 May 2022