SDG’s 1HFY24 results disappointed consensus but exceeded Kenanga’s expectations. 2QFY24 core net profit strengthened on good downstream performance. Upstream FFB harvest, CPO and PK prices also improved. SDG also announced another industrial property project signifying a more strategic shift toward unlocking asset value moving ahead. FY24-25F core net profits are upgraded by 11% and 4% respectively. TP is also raised by 5% to RM4.20 (from RM4.00) but MARKET PERFORM maintained as the market may have priced in upside from its new projects prematurely.

Upbeat 1HFY24 core net profit. Adjusting for fair value loss (RM11m), foreign exchange loss (RM1m) and asset write-down (RM10m), 1HFY24 core net profit of RM396m (+92 YoY) amounted to 54% and 46% of Kenanga’s and consensus respective full-year estimates. The positive variance against our forecast came largely from much stronger downstream performance which saw PBT of RM346m, up by 80% YoY.Upstream also improved modestly by 10% YoY on higher FFB harvest (+8%), CPO price (+4%) and PK price (+16). Fuel and fertiliser costs also eased, thus nudging up upstream margins YoY.

An interim DPS of 4.65 sen was declared, higher than 1HFY23’s 3.25 sen but we maintain full-year DPS of 15.0 sen or similar to the quantum last year which included a special dividend of 5.7 sen.

2QFY24 core net profit inched up QoQ and YoY on higher FFB production (+11% QoQ, +8% YoY) as well as better CPO and PK prices. Weaker fuel and fertiliser prices also reduced production cost leading to better upstream margins. Downstream margin was dull but stable on early recovery in Europe and encouraging Asian demand.

Firm upstream outlook to compensate for downstream softness.

Globally, edible oil demand is expected to grow faster than supply for this year and, increasingly likely, for next year as well. A supportive pricing environment for edible oil is thus taking shape but inventory levels should stay high enough for supply-demand balance to stay manageable, hence edible oil prices are expected to trade sideways rather than on an uptrend surge.

• Upstream CPO prices are expected to average around RM3,800 per MT in FY24/FY25. Lighter costs, thanks to lower fuel and fertiliser prices, are expanding FY24 margins with some help from recovering PK prices as well. Higher PK prices are also expected to help absorb some increases in wages moving forward into FY25. FFB output is also expected to improve in FY24 before stabilising in FY25.

• Downstream saw encouraging Asian demand which should persist over FY24 and FY25. Meanwhile, the good margins from Europe in 2QFY24 may normalise moving forward albeit still resulting in good recovery in FY24 and FY25 downstream earnings.

• New property and renewable energy angles - but earnings seen only after 2-3 years of gestation. In May, SDG announced a 1,000-acre Kerian Integrated Green Industrial Park (KIGIP) cum solar farm development in north Perak with parent PNB. Yesterday, SDG announced it is collaborating with TH Property to develop 464-acre in Negeri Sembilan near KLIA and along the border with Selangor as an extension of TH Property’s successful “techpark@enstek.” Earnings from both projects are expected to take another 2-3 years or longer for KIGIP to bear fruit. Even so, upstream plantation contribution looks set to stay core to group earnings for years to come.Nonetheless, we welcome SDG’s effort to improve long-term earnings and ROEs by optimising its resources, in this case unlocking the value of desirably located land banks.

Forecasts. FY24-25 core net profit forecasts are raised by 11% and 4%, respectively, to account for firmer upstream and the recovery downstream.

Valuations. Reflecting higher earnings, our TP is upgraded by 5% from RM4.00 to RM4.20 based on 1.6x PBV, a discount to average 2x for large integrated peer due to SDG’s lower 5-year average ROE of 8% vs. 10% of its peers. SDG’s efforts to improve return is a positive but actual contribution to the bottom line will take time (2-3 years or beyond) and face execution risks. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

Investment case. With some of its estates ripe for property development, SDG is defensive and undervalued from an asset point of view but long-term expansion plans and productivity management strategies would be viewed positively; though the timing and actual impact on earnings are less clear; hence, we are keeping our MARKET PERFORM call.

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 - 22 Aug 2024