• Maintain NEUTRAL, with new MYR4.20 TP from MYR4.40, 3% downside. Sime Darby Plantation’s 1H23 earnings disappointed. While we expect 2H23 to improve on the back of higher output, lower unit costs, and improved downstream margin, we believe the stock remains fairly valued, trading at 19.3x 2024F P/E, at the high end of its peers’ 16-20x.

• 1H23 core earnings came in below our and consensus earnings, at 31- 33% of FY23F. This was due to lower-than-expected FFB output and higher-than-expected unit costs. SDPL declared an interim DPS of 3.25 sen (1H22: 10 sen).

• New FY23 FFB growth guidance of 10%. 2Q23 FFB output rose 12% QoQ, bringing 1H23 FFB to -3.1% YoY. This was lower than SDPL’s guidance of 10% growth and our forecast of 4.4% growth. Productivity for new harvesters improved to 1.4 tonnes/day in 2Q23 (from 1 tonne/ha in 1Q23), while harvester shortage also improved to c.4-5% in 1H23. The shortage of harvesters is currently only in East Malaysia and SDPL expects this to be fully resolved by September. In 7M23, FFB output improved to -0.5% YoY and the company is expecting this to improve further bringing FY23 FFB growth to a high single digit. To be conservative, we keep our FY23-25 FFB growth assumption of 4-5%.

• Forward sales continue for Malaysia and PNG. For 2H23, SDPL sold about 50% of its Malaysian output forward at MYR3,950/tonne, while it has sold 25% of its Papua New Guinea (PNG) output forward at USD970/tonne. CPO price achieved in 1H23 was MYR3,824/tonne (-21% YoY).

• FY23 cost guidance lowered. 1H23 blended unit costs rose 17% YoY to MYR2,800/tonne from higher fertiliser and recruitment costs. However, SDPL is now guiding for costs of MYR2,500/tonne for FY23 (from MYR2,600-2,700), as productivity improvements will help lower unit costs. Fertiliser prices are projected to be 8-9% lower HoH in 2H23, bringing FY23 fertiliser costs to 18-20% higher YoY. In 1H23, it completed 80% of its planned fertiliser application for Malaysia and 90% for Indonesia and PNG. We have raised our unit cost assumptions by 5-10% to account for higherthan-expected fertiliser cost increase.

• Downstream margin improved to 3.2% in 2Q23 (from 2% in 1Q23), bringing 1H23 margins to 2.7% (from 4.1% in 1H22). SDPL saw lower volumes and margins in Asia Pacific, although this was offset by improved volumes and margins at its European refineries. It expects margin to remain weak in 2H23 in its Asian refineries with a low utilisation at 50-55%, but for continued margin improvement in Europe due to lower energy costs.
• All in, we moderate FY23F-24F earnings by 4-12% after raising unit costs. We expect 2H earnings to play catch up on improved output, lower costs and better downstream margin.
• Maintain NEUTRAL with a lower SOP-based MYR4.20 TP. This includes a 4% ESG discount given its score of 2.8.

Source: RHB Securities Research - 24 Aug 2023