SIMEPLT’s 9MFY22 results missed expectations. Its Malaysian upstream operation reported 3QFY22 losses as labour shortage capped production with softer production guidance up till possibly 1HFY23. 3QFY22 group-wide FFB harvest inched up 4% QoQ but softer CPO prices dragged earnings down QoQ and YoY. We are downgrading FY22F/FY23F core EPS (CEPS) by 19%/18%, our rating from MARKET PERFORM to UNDERPERFORM and TP from RM4.40 to RM3.65 based on historical integrated 15x PER against FY23F CEPS.

9MFY22 core net profit of RM1,517m disappointed, coming in at only 60% and 56% of our full-year forecast and the full-year consensus estimates, respectively. The variance against our forecast came largely from higher-than-expected production cost, which rose from less than RM2,500 per MT CPO to nearly RM3,000 on higher fertiliser cost as well as lower fruit production.

9MFY22 group EBIT managed to grow 7% YoY to RM2,828m thanks to stronger downstream margins which lifted EBIT to RM772m (+197% YoY) but upstream EBIT fell 16% YoY to RM1,979m. 3QFY22 upstream performance was much weaker than expected. The Malaysian upstream operation registered a loss of RM145m (vs. RM327m EBIT last year) and Papua New Guinea operation’s earnings of RM29m (-89% YoY) was dampened by outbound shipping delays which affected sales. Overall, 3QFY22 FFB production inched up 4% QoQ but was 8% below last year’s while CPO price fell 18% QoQ to RM4,277/MT. 9MFY22 average CPO price of RM4,648/MT (+31% YoY) was better than last year but cost also rose, not just from higher fertiliser cost but also on lower fruit output. The Malaysian upstream operation struggled with FFB production in 3QFY22, harvesting only 900K MT (+4% QoQ, -27% YoY) due to labour constraints as the group adjusts to new, tighter procedures in recruiting and managing overseas workers. No dividend was declared for 3QFY22, which is expected. Net gearing eased from 38% in 2QFY22 to 36% for 3QFY22 on lower working capital requirements. Including perpetual debt, net gearing dropped from 53% to 49%, QoQ.

Looking ahead, edible oil demand usually edges up steadily year after year at 3-4% p.a. However, unlike past seasons, demand in 2023 may register stronger than usual YoY growth despite possible economic slowdown/recession in US and Europe. For one, the spread of Covid- 19 across the world dampened demand over 2020-21 with some recovery seen in 2022 which we expect to continue into 2023. China, a big vegetable oil market, has yet to revert to a new post Covid normal, though some relaxations are hinting of more easing to come, probably after this winter. Energy prices are also elevated which have and likely to continue to be supportive of biofuels. Lastly, as palm oil is trading at steep discounts to major vegetable oils, notably soy oil; hence, very competitive at the moment. All in all, we expect CPO prices to stay firm, between RM3,500/MT to RM4,000/MT for the rest of CY22 and into CY23. Average CPO price forecasts of RM4,000/RM3,500 per MT for FY22/FY23 are maintained but the production cost for SIMEPLT is raised from under RM2,500 per MT CPO to about RM3,000.

Source: Kenanga Research - 23 Nov 2022