• Maintain NEUTRAL and MYR4.15 TP, 7% downside with 2% FY24F yield. Sime Darby Plantation’s plan to develop a green park for solar farms is a positive, in our view, given the higher returns for solar power and the utilisation of less productive agricultural land, while it advances ahead in achieving its net-zero emissions target. The impact of this plan on earnings should be minimal, given SDPL’s large earnings base. The stock is trading at a fair 21x 2024F P/E, which is at the high end of its peer range of 18-21x.

• SDPL and its largest shareholder Permodalan Nasional intend to collaborate on a 1,000-acre project, Kerian Integrated Green Industrial Park (KIGIP) in Perak. This area, owned by SDPL under its Tali Ayer Estate, is currently planted with oil palm. KIGIP is an initiative between the Federal Government and Perak State Government to attract green E&E investments into Malaysia, thanks to its proximity to the North-South Expressway.

• The green park will involve solar farms spanning 660 acres which will be operated by SDPL, while the rest of the space will house commercial and residential facilities, as well as utilities, amenities, and large green spaces. Future phases of the development will progress upon the completion of its first phase. Plans are subject to feasibility studies, due diligence, legal requirements, and other internal approval processes.

• Positive contribution expected. We are still awaiting further details on this initiative, including details of the shareholding of this venture, development cost as well as GDV of the remaining areas to be developed. However, based on our estimates, 660 acres of land would be able to fit around 220MWdc of solar farms, costing c.MYR550m. The latest Large-Scale Solar or LSS bid will close in July. If SDPL wins the bid and is able to start construction works shortly after, the solar farms should be completed in 2026. As the usual ROI for solar farms is a mid-to-high single digit, our back-of-the-envelope calculation on its net earnings contribution is c.MYR10-20m pa, after stripping out CPO earnings and funding costs (assuming 100% stake).

• Advancing its net-zero initiative. This should not greatly impact SDPL’s earnings base, but advance its push towards net zero – as it targets a 42% reduction in Scope 1 and Scope 2 carbon emissions by 2030. SDPL is also identifying other less productive agricultural lands to be converted into solar farms, and discussions with several state agencies are ongoing. It is also exploring opportunities with partners to develop data centres. SDPL already leases its land to third-party solar farms – 40% of the quota for LSS4 as well as 38% of the Corporate Green Power Programme quota is on SDPL land.

• Our MYR4.15 TP includes a 0% ESG discount. SDPL is trading at a fair 21x 2024F P/E, which is at the high end of its peer range of 18-21x. We make no changes to FY24-26F earnings.

Source: RHB Research - 8 May 2024