This article first appeared in The Edge Financial Daily on June 4, 2018 - June 10, 2018
Sime Darby Plantation Bhd
(June 1, RM5.35)
Maintain market perform with a lower target price (TP) of RM5.60: Sime Darby Plantation Bhd’s nine months of financial year 2018 (9MFY18) core net profit (CNP) at RM852 million was below expectations, at 65% of the consensus RM1.32 billion forecast and 61% of our RM1.4 billion estimate on above-expectations unit cost due to severe weather impact. However, fresh fruit bunch (FFB) production at 7.8 million tonnes was within expectations, at 76% of our 10.2 million-tonne forecast. No dividend was announced as expected.
Its 9MFY18 CNP was flat with higher FFB production (+6%) offset by lower crude palm oil (CPO) prices (-9%). In the upstream segment, core profit before interest and tax (PBIT) (excluding non-recurring disposals) declined by 7%. Although Malaysia-led FFB production grew at +19% to 4.61 million tonnes, this could not offset weaker margins from Indonesia (-9% to 1.96 million tonnes) and Papua New Guinea (PNG) (-7% to 1.18 million tonnes) due to severe wet weather. Downstream core PBIT declined 12% to RM199 million on weaker bulk demand for basic refined products. Quarter-on-quarter, third quarter of FY18 CNP weakened 42% on both lower CPO prices (-8%) and FFB production (-15%). Upstream core PBIT halved on margin compression, where Malaysia declined 20% to 1.37 million tonnes and Indonesia weakened 27% to 523,000 tonnes. Downstream PBIT improved 2% on a higher bulk contribution (+80% to RM18 million), likely on better seasonal demand.
Management expects FFB production to improve on better Malaysian production, although Indonesia and PNG are both likely to see a decline due to weather disruptions in the second half of FY18. We concur with management’s outlook and maintain our estimate of +4% FFB growth in FY18. In a briefing to analysts, management discussed impairments and write-downs to-date, which involved non-core businesses, including Indonesian rubber assets and biotech businesses. Management is continuing its review of non-core and non-performing assets, to be completed by year end. This may include partial disposals of its estates or refineries. Management also did not rule out acquisitions of new plantation areas in existing regions. This long-term positive indicates a continued focus on core business segments. But management said the potential minimum wage hike would negatively impact cost of production, although we think that the recently announced postponement should ease short-term cost worries.
We reduce our FY18 estimated (E), 6MFY18E, FY19E CNP by 9%, 7%, -6% to RM1.27 billion, RM724 million and RM1.48 billion respectively, as we update our cost assumptions on narrower margins.
We maintain “market perform” with a lower TP of RM5.60 (from RM5.90) based on an unchanged forward price-earnings ratio (PER) of 26 times applied to lower average calendar year 2018 (CY18) E and CY19E EPS of 21.5 sen (from 22.9 sen). Our target forward PER of 26 times implies a 5% premium to integrated peers’ valuation, thanks to its market leadership position. We maintain our call in view of its average near-term production growth (5% in CY18E and CY19E versus the sector average of 8%). Risks to our call include lower-than-expected CPO prices, lower-than-expected production and higher-than-expected fixed costs. — Kenanga Research, June 1