• Maintain NEUTRAL, with new MYR4.15 TP from MYR4.55, 8% downside. Sime Darby Plantation’s FY23 disappointed on the back of losses in Papua New Guinea (PNG) and weaker downstream margins. Going forward, we expect FY24F to record stronger earnings from improved CPO prices and lower unit costs. Nevertheless, we believe the stock remains fairly valued – trading at 21x 2024F P/E, at the high end of its peer range of 18-21x.

• FY23 results missed expectations, at 90% and 68% of our and consensus FY23F, with 4Q23 profit falling 50% QoQ. The main discrepancy came from losses recorded in PNG due to higher levels of inventory in transit as well as lower-than-expected downstream margin. SDPL declared a final DPS of 6.05 sen bringing YTD DPS to 15 sen (FY22: 16 sen). This translates to a net payout of 56% and yield of 3.3% FY23.

• FY24 FFB growth guidance of mid-single digit. 4Q23 FFB output fell 2% QoQ, bringing FY23 FFB to +6.1% YoY. This is lower than SDPL’s guidance of 10% growth but above our forecast of 4.4% growth. FFB output was dragged by Indonesia, which saw a 12% QoQ decline in 4Q23 due to the impact of El Nino. SDPL expects the weather impact to continue affecting Indonesia’s output in 2024 and is guiding for mid-single digit FFB growth for the group FY24. This is despite the +12.8% YoY growth so far in 1M24. We keep our FY23-24F FFB growth assumption of 4-6%.

• Forward sales lessen for Malaysia and PNG. For 2024, SDPL has sold about 15-20% of its Malaysian and PNG output forward at c.MYR3,800- 3,900/tonne. CPO price achieved in FY23 was MYR3,772/tonne (-15% YoY).

• FY24 cost expected to moderate slightly. FY23 blended unit costs rose 4% YoY to MYR2,600/tonne from higher fertiliser and recruitment costs. In FY23, SDPL almost completed all of its planned fertiliser application for the year. SDPL is now guiding for costs to moderate only slightly to MYR2,500/tonne in FY24. This is despite lower tendered fertiliser prices (of 10-20% YoY) as SDPL continues to do rehabilitation works on its estates in 2024. We raise our cost assumptions accordingly for FY24-25.

• Downstream margin fell to 3.9% in 4Q23 (from 5.3% in 3Q23), bringing FY23 margins to 3.7% (from 4.6% in FY22). This was due to lower trading profit in 4Q23 (-74% QoQ). Going forward, SDPL continues to expect strong margin in the EU and weak margin in Asia, but expects to be able to maintain margin at 4-5% for 2024. We make no changes to our downstream margin assumption of 4% for FY24-26.

• All in, we lower FY24F-25F earnings by 8-9% after raising our cost assumptions for FY24-25F.

• Maintain NEUTRAL, with a lower TP of MYR4.15, which includes a 0% ESG discount. Valuation is fair at current levels. SDPL is trading at 21x 2024F P/E, which is at the high end of its peer range of 18-21x.

Source: RHB Research - 23 Feb 2024