Sime Darby Plantation - Headwinds Abate

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-0.33 (7.62%)

SIMEPLT’s 9MFY23 results beat our forecast but met market expectation. Its 3QFY23 core net profit jumped 36% QoQ on better FFB output, lower upstream cost and stronger downstream margins. We upgrade our FY23-24F net profit forecasts by 24% and 55%, respectively, lift our TP by 10% to RM4.00 (from RM3.65) and upgrade our call to MARKET PERFORM from UNDERPERFORM.

Its 9MFY23 core net profit of RM682m (-55% YoY) beat our expectation at 88% of our full-year forecast but met market expectation at 64% of the full-year consensus estimate. The variance against our forecast came largely from lower costs and better downstream margins.

Its 3QFY23 core net profit improved to RM350m (+36% QoQ, +19% YoY) as upstream EBIT improved to RM547m (+42% QoQ, +122% YoY) on much better FFB output from the Malaysian operations which is now running at almost full workforce in a good fruiting season. Overall unit cost fell by about 15% QoQ to RM2,300-2400 per MT. 3Q downstream margins also did better than expected on robust European demand. Its 3QFY23 CPO price held QoQ at RM3,777 per MT.

Its 3QFY23 and 9MFY23 net profits were much higher than our CNP estimates due to disposal gains. 3QFY23 net profit of RM1,211m included RM885m of such gains while 9MFY23 net profit of RM1,660m was lifted by RM1,081m of disposal gains. Group net debt was pared down as a consequence, from RM9,158m (53% net gearing) a quarter ago to RM7,371m (41% net gearing) as of end Sept 2023. SIMEPLT thus declared a 5.7 sen special dividend in Oct which goes ex on 27 Dec 2023.

Abating costs, firm selling prices. Global edible oil supply is improving but so is demand thus inventory levels are not expected to increase much. Therefore, CPO prices are expected to stay firm, averaging RM3,800 per MT for FY23-24. However, fertiliser and fuel costs have been trending down which should translate to lower production cost moving into 4QFY23 and FY24. Labour shortfall in Malaysia has largely been addressed so harvest should improve in the coming months. Altogether, CPO cost, whilst still high, should ease.

Downstream demand remains a challenge due to intense competition from Indonesian rivals while the implementation of stricter non-deforestation rules on palm oil by EU towards the end of next year are not helping matters. Tighter margins and soft downstream contribution are likely to prevail into FY24.

Forecasts. We raise our FY23-24F net profit forecasts by 24% and 55%, respectively, largely to reflect flattish CPO prices, improving harvest, and lower costs.

Consequently, we lift our TP by 10% to RM4.00 based on 1.6x FY24F PBV, at a discount to an average of 2x for its peers (i.e. large integrated planter) to reflect its lower 5-year average ROE of 8% vs. 10% of its peers. We previously valued it at RM3.65 based on 1.5x FY24F PBV. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

We now see value in SIMEPLT although we continue to stay cautious on its elevated cost base which can drag long-term profits and returns. Upgrade to MARKET PERFORM from UNDERPERFORM

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 fertilizers.

Source: Kenanga Research - 27 Nov 2023

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