Sime Darby Plantation - A Year of Consolidation

Date: 
2024-02-23
Firm: 
KENANGA
Stock: 
Price Target: 
4.00
Price Call: 
BUY
Last Price: 
2.76
Upside/Downside: 
+1.24 (44.93%)

SIMEPLT’s FY23 results disappointed. Its 4QFY23 performance was weighed down by weaker CPO prices, mixed FFB outputs and higher costs in overseas operations. Its Malaysian operations recovered with optimum workforce amidst a fruitful season in 4Q but Indonesia and PNG weakened. We maintain our FY24F net profit forecast on further upstream normalisation, TP of RM4.00 and MARKET PERFORM call.

Its FY23 core net profit of RM879m (-57% YoY) missed our forecast and the consensus by 7% and 40%, respectively. The variance against our forecast came largely from lower FFB harvest and higher costs in Indonesia and PNG. Indonesian yields were affected slightly by El Nino while heavy rain disrupted harvesting in PNG.

Its 4QFY23 core net profit dipped QoQ and YoY as upstream EBIT fell to RM255m (-82% QoQ, -64% YoY). Overall, 4QFY23 harvest was flat QoQ but improved strongly YoY to 2.394m MT (-2% QoQ, +15% YoY) as the Malaysian upstream continued to normalise with optimum workforce amidst a fruitful season. 4QFY23 CPO price of RM3,688 per MT (-2% QoQ, -8% YoY) was good but higher cost dragged down Indonesian contributions while PNG registered losses. We suspect heavier upkeep and still high manuring cost are still affecting 4QFY23 upstream operations. Downstream performance was mix, lower QoQ but better YoY on firm European demand for its PNG oil. Net debt fell further QoQ, from RM7,371m (41% net gearing) to RM6,904m (39% net gearing). A final dividend of 6.05 sen was declared bringing fullyear DPS to 15.0 sen including a 5.7 sen of special dividend.

Better upstream outlook. Global edible oil demand uptick is expected to outpace supply growth; hence, inventory outlook is tight with likelihood of minimal increase or even falling. CPO prices are thus expected to average around RM3,800 per MT over FY24-25. Coupled with lower fertiliser and fuel costs, forward margins are expected to improve. Palm kernel (PK) prices, which has fallen since mid-2022, may improve from some restocking towards end-2024 or early 2025. A by-product of CPO mills, additional PK proceeds will simply lower CPO cost further. Moreover, in 1HFY23 the Malaysian upstream saw high costs from inflow of fresh workers which lifted cost while productivity was still low. This situation should normalise over FY24-25; hence, better upstream performances can be expected over the next 12-24 months.

Mixed downstream outlook. Refining profit is set to stay tight on intense competition while other downstream contributions are expected to be mix with flattish YoY outlook over FY24-25.

Forecasts. We maintain our FY24F net profit forecast and introduce a firmer FY25F number on more normal costs amidst flat CPO prices and downstream margins.

Valuations. We also maintain our TP of RM4.00 based on 1.6x FY24F PBV, a discount to average 2x for large integrated peer due to SIMEPLNT’s lower 5-year average ROE of 8% vs. 10% of its peers. No adjustment was made to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). With some estates ripe for property development, SIMEPLT is defensive and undervalued from an asset point of view but long-term expansion plans and productivity management strategies are less clear cut; hence, we are keeping our MARKET PERFORM.

Risks to our call include: (i) Western hostility towards palm oil on sustainability and bio-diversity issues, (ii) impact of weather and labour shortages on production, (iii) weak CPO and palm kernel prices, and (iv) cost inflation particularly fertilisers.

Source: Kenanga Research - 23 Feb 2024

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