• Maintain NEUTRAL, with new MYR4.60 TP from MYR4.80, 5% upside. Sime Darby Plantation’s 1H22 core earnings were in line with our, but below consensus, at 45-50% of FY22F. While FY22F net profit should be stronger YoY, FFB output is likely to decline as the labour shortage will continue to be a drag on earnings. SDPL is fairly valued, trading at 16.6x 2023F P/E, in line with its peers of 13-17x 2023F.

• Less forward sales for 2H22. SDPL has locked in forward sales for its Malaysian production (14% of 2H22 output), at c.MYR5,100/tonne. CPO price achieved in 1H22 was MYR4,868/tonne, below the Malaysian Palm Oil Board (MPOB) price of MYR6,530/tonne, as lower Malaysian and Indonesian prices were offset by stronger Papua New Guinea (PNG) ASP.

• 1HFY22 FFB fell 15% YoY despite a 9% rise QoQ in 2Q22, dragged down by Malaysia (-25%) and Indonesia (-6%). YTD-July, this has moderated slightly to -13.9% YoY. SDPL has revised its FFB guidance for FY22 to negative growth of no more than 10% (from 0% to -5% previously), given the continued labour shortage situation. The first batch of 170 workers came in recently, with SDPL hoping for 3,000 workers to come in by year-end. The shortage has worsened to 38% from 32% last quarter. We reduce our FY22F FFB growth to -8.4% (from 0%) while keeping our FY23F-24F FFB growth at 4-6%.

• 1H22F unit costs rose 40% YoY to MYR2,400/tonne (blended), due to higher fertiliser costs, staff remediation costs, windfall taxes and lower output. SDPL is now guiding for unit costs to remain around MYR2,400/tonne for FY22, or c.20% up YoY, as production improvement in Malaysia is unlikely to be significant given the labour shortage.

• Downstream margin was higher in 1H22 (at 4.1%) vs 2.9% in 1H21, despite lower blended capacity utilisation at 58% (from 63% in 1H21). This came on the back of the lifting of the export ban in Indonesia and as SDPL took advantage of the surplus feedstock in the country. As at end-2Q22, inventory has risen to 415k tonnes (from 392k tonnes end-March) vs normal levels of around 300k. SDPL expects to be able to normalise inventory levels within the next few months.

• No news yet on US Customs and Border Protection (CBP) ban. SDPL is still waiting for the US CBP to modify/revoke the forced labour findings and has had several engagements with the enforcement agency since the submission of Impactt’s independent audit report at end-April. This included hosting its visit to Malaysia between 31 May and 4 Jun.

• We lower our FY22F-24F earnings by 5-12%, after imputing lower FFB output, and subsequently, higher unit costs.

• Our SOP-derived TP is revised down to MYR4.60, based on unchanged P/E targets of 20x 2023F for the plantation division, and 12x for the downstream division. Our TP includes an ESG discount of 8%, to account for SDPL’s ESG score of 2.6.

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

Source: RHB Research - 24 Aug 2022