Review

• Sime Darby Plantation Berhad’s (SIMEPLT) 4QFY23 earnings came in below expectations. The deviation was mainly due to lower margins and higher finance costs. Excluding all exceptional items, the core net profit plunged 53.1% YoY to RM189mn, in tandem with the drop in revenue (- 6.9% YoY).

• Cumulatively, FY23 earnings fell 54.7% YoY to RM895mn while revenue also decreased by 12.4% YoY to RM18.4bn.

• Upstream: Despite higher FFB production (+6.1% YoY), FY23 PBIT fell by 14.9% YoY to RM2.2bn. Excluding all the disposal gains and exceptional items, recurring PBIT plunged 51.7% YoY to RM1,155mn. The weak performance was mainly dragged by lower palm oil prices and higher operating costs.

• FY23 average CPO prices dropped 15.4% YoY to RM3,772/tonne, while PK prices also plunged 34.9% to RM1,751/tonne. The group experienced higher FFB production growth in Malaysia (+18.1% YoY) to 4.1mn tonnes, mainly attributable to increased workforce. Meanwhile, the Indonesia and Papua New Guinea / Solomon Islands registered weaker FFB production of 2.7mn tonnes (-3.5% YoY) and 1.9mn tonnes (-2.2% YoY).

• Downstream: FY23 PBIT declined by 30.2% to RM417.0mn, mainly dragged by weaker profits from the Asia Pacific bulk and differentiated refineries as a result of lower sales margins and volume as well as lower contribution from JVs.

• The group declared a final single tier dividend of 6.05sen/share. This will bring the total FY23 dividend to 15.0 sen/share (vs. FY22: 16.0 sen/share). Highlights from the Analyst Briefing:

• Management expects the FFB production to grow by high single digits in FY24. According to management, the growth will be mainly driven by Malaysia operations due to ease of foreign worker shortages, particularly harvesters.

• According to management, El Niño has not caused any impact on Malaysia operations. Although Indonesia has experienced dry weather, the production is still expected to grow slightly in FY24. While for PNG, FFB production will also see some growth.

• The unit production cost is expected to drop by about 4% in FY24, mainly due to increase in yield and lower fertiliser costs.

• A more significant cost reduction will only be seen in FY25, as guided by management.

Impact

• We tweak our FY24 - FY25 earnings forecast lower by 4.5% - 13.3%, respectively, after factoring in lower-than-expected FY23 results and higher finance costs. Meanwhile, we also imputed lower our FFB production forecast to be in line with management guidance. Besides, wetake this opportunity to introduce our FY26 earnings forecast of RM1,699mn.

Valuation

• Post the earnings downgrade, the target price is revised lower to RM4.46/share (RM4.67 previously), based on CY24 PER of 20x. Given the limited upside potential and lack of major re-rating catalysts in the near term, we downgrade SIMEPLT to SELL (from Hold).

Source: TA Research - 23 Feb 2024