• Upgrade to BUY from Neutral, new SOP-based TP of MYR5.35 from MYR4.25, 17% upside with c.2% FY24F yield. Post analyst briefing, we are more upbeat on SD Guthrie’s diversification plans, given the more specific targets in place. While earnings contributions from diversification will only come through from 2026 onwards, we believe the market will accord more value for its new earnings streams plus potential dividends. We now include an RNAV for its landbank into our SOP valuation.

• 1H24 results were broadly in line, at 45-46% of our and consensus FY24 estimates, boosted by a strong QoQ core earnings growth of +85% in 2Q24.

• Moderating cost of production. SDG’s 2Q24 cost of production came in at MYR2,537/tonne (about 32 lower YoY), thanks to the lower cost in Malaysia (2Q24: -24% YoY) on improved FFB production (+38% YoY). This brought its 1H24 cost of production to MYR2,567/tonne (-7.5% YoY). SDG has applied 75-80% of its budgeted fertiliser requirements for 1H24, and expects to be able to catch up in 2H24. It also expects to end the year with unit costs at MYR2,500 – MYR2,600/tonne, in line with our estimates.

• Expanding its UK downstream capacity. Downstream PBT for 1H24 jumped 80% YoY, thanks to better margins and volumes in Europe, as buyers are locking in volumes and premiums pre-EU Deforestation Regulation or EUDR implementation. As its European operations are running at full capacity, SDG is looking to expand its refinery in Liverpool by 200,000 tonnes (+100%) – this is targeted to come on-stream in 2026. Overall, SDG is guiding for better downstream margins in 2H24, with losses in its Indonesia refineries subsiding as the country’s Domestic Market Obligation policy is loosened.

• Diversifying in a big way. SDG will work with TH Properties to develop a HALMAS-certified industrial park across 464 acres in Bukit Pelandok. Management is targeting to sign the definitive SPA within four months (by Nov 2024) and will start marketing in 2025. In the long term, SDG’s 5-year target is for the uplift from land conversion and sale and participation in industrial parks to hit MYR1bn in profit pa. It has identified over 10,000 acres of estate land in West Malaysia as suitable for industrial development, and targets to develop 1,000-1,500 acres yearly into industrial parks. As for solar energy generation, management is looking at an ROI of 8-10% from its long- term targeted investment of 1GW, which will cost MYR2.5-3bn, with earnings contributions to start coming in from 2026 onwards.

• Forecasts are unchanged as we are unable to impute any of these new ventures into our forecasts, given the early stages of planning. However, we now add an RNAV for its landbank into our SOP valuation. As we are unable to identify exactly which area will be developed, we have included all SDG’s freehold land into our SOP valuation, and discounted the RNAV at 75%. Our revised MYR5.35 TP includes a 0% ESG premium/discount.

Source: RHB Research - 23 Aug 2024