• Maintain NEUTRAL and MYR4.60 TP, 6% upside. Sime Darby Plantation’s 9M22 core earnings were slightly below our and consensus earnings, at 63-70% of FY22F, due to lower FFB output and high inventory levels. We expect 4Q22 to come in stronger due to the recovery in CPO prices and the normalisation of inventory levels. SDPL is fairly valued, trading at 16.2x 2023F P/E, at the high end of its peers of 12-16x 2023F.

• High inventory levels at end-3Q22 of 288k tonnes (mostly in Indonesia and PNG), about 200k tonnes more than its normal stock levels. If this is normalised by year-end, SDPL should see higher QoQ profits in 4Q22.

• Remaining 4Q22 output fully committed for Malaysia and Papua New Guinea (PNG), but less forward sales for 2023. For 2023, it has sold about 8% of its Malaysian output forward at MYR4,400-4,500/tonne. CPO price achieved in 9M22 was MYR4,648/tonne (+31% YoY).

• 9M22 FFB fell 12% YoY despite a 4% rise QoQ in 3Q22, dragged down by Malaysia (-26%). SDPL has revised its FFB guidance for FY22 to a low double-digit negative growth (from -5-10%), given the continued labour shortage situation. SDPL has received 1,700 new workers, with another 1,300 to come by year-end and 6,000-7,000 by 1H23. Despite this, SDPL still has a shortage of 3,000-4,000 harvesters (or 27-36%) currently, (down from 38% last quarter). We reduce our FY22F FFB growth to -12.7% (from -8.4%) while raising our FY23F-24F FFB growth to 5-9% (from 4-6%).

• 9M22F blended unit costs rose 35% YoY to MYR2,400/tonne, due to higher fertiliser costs, staff remediation costs, windfall taxes and lower output. SDPL is guiding for unit costs to moderate slightly in FY22, as fertilisation activities are unlikely to be completed for the year. SDPL has only completed 70% of its planned application for 9M22 in Malaysia and PNG, and expects to complete about 80-90% by year-end.

• Downstream margin rose in 9M22 (at 4.5%) vs 2.4% in 9M21, despite lower blended capacity utilisation at 61% (from 64% in 9M21). This came from trading gains amidst a volatile CPO price environment as well as tight refinery supply. SDPL is building a new USD150m 450,000 tonne specialty fats refinery in Sumatra costing which will start construction in 1Q24.

• No news yet on US Customs and Border Protection (CBP) ban. Meanwhile, the RSPO has belatedly issued a letter on 14 Nov following its independent verification audit conducted from beginning 2021 stating that there are violations of critical RSPO Standards, including the payment by workers of recruitment fees to agents and the retention of passports. We note that these are not new issues and have already been resolved, all of which has been articulated to RSPO.

• Maintain NEUTRAL and SOP-based TP of MYR4.60. We lower FY22F earnings by 6%, but tweak FY23F-24F earnings up 1-3%. Our TP is relatively unchanged at MYR4.60, based on 20x 2023F P/E 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.

Source: RHB Research - 23 Nov 2022