• Maintain NEUTRAL, with new MYR4.00 TP from MYR4.55, 9% downside. Sime Darby Plantation’s 1Q23 earnings disappointed. 2Q23F will likely still be weak, but 2H23F should see better output growth, lower unit costs and improved downstream margins. The stock remains fairly valued, trading at 20x 2023F P/E, at the high end of its peers’ 15-18x.

• 1Q23 core earnings were below our and consensus earnings, at 6-7% of FY23F. This was due to lower-than-expected FFB output, PK prices and higher-than-expected unit costs and effective tax rates of 58% due to withholding tax payable on dividends from foreign subsidiaries.

• New FY23 FFB growth guidance of 10%. 1Q23 FFB fell 4.5% YoY and 12% QoQ, dragged down by Malaysia (-11%). This was due to poor productivity for new harvesters – productivity for those who joined in 1Q23 was half that of experienced harvesters. SDPL expects its harvester shortage to improve to c.12% by end-1H23 (from 22% at end-4Q22) including 2,250 new workers it expects to come in by June. In 4M23, FFB output moderated further to -8% YoY. It is now guiding for FFB growth of 10% (from 10-15%), as it continues to expect a marked recovery in 2H23. To be conservative, we cut our FY23 assumption to 4.4% (from 9.5%) while keeping our 4-5% growth for FY24F-25F.

• Forward sales continued for Malaysia. For the rest of 2023, it has sold about 20% of its Malaysian output forward at MYR4,050/tonne, while there is a negligible amount sold forward for Papua New Guinea (PNG). CPO price achieved in 1Q22 was MYR3,887/tonne (-13% YoY).

• FY23F cost guidance raised. 1Q23 blended unit costs rose 15% YoY to MYR2,700/tonne from higher fertiliser and recruitment costs. SDPL is now guiding for costs at MYR2,600-2,700 (+5-6% YoY) in FY23 (vs MYR2,100- 2,300), expecting fertiliser prices to lift 13-14% YoY, while labour cost rise is due to recruitment costs and minimum wage. SDPL has to pay c.MYR4,500/worker for recruitment costs. In 1Q23, it completed 60% of its planned fertiliser application for Malaysia and 100% for Indonesia and PNG.

• Downstream margin at 2% in 1Q23 (from 3.3% in 1Q22 and 2% in 4Q22). SDPL saw lower sales volumes in the bulk segment and lower margins for both bulk and differentiated products in Asia-Pacific. It expects margin to remain weak in 2Q23 with losses at its Malaysian and Indonesian refineries, but improve in 2H as buyers’ inventory runs down.

• All in, we lower FY23F-24F earnings by 12-14% after cutting FFB output, PK prices and raising unit costs. We expect 2H earnings to play catch up on improved output, lower costs and better downstream margins. We are in the midst of reviewing our FY24F CPO price assumptions. Our lower SOP- based MYR4.00 TP includes an 4% ESG discount given its score of 2.8.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 25 May 2023