This article first appeared in The Edge Financial Daily on January 5, 2018 - January 11, 2018

Sime Darby Plantation Bhd
(Jan 4, RM5.55)
Initiate with a neutral call with a target price of RM5.68: Sime Darby Plantation Bhd, which is formerly part of Sime Darby Bhd, has become a pure play plantation company following the completion of the demerger exercise.

On Nov 30, Sime Darby Plantation and Sime Darby Property were demerged from Sime Darby Bhd through a share split exercise, where the shareholding remains the same for all the three entities during post-demerger.

Indeed, the demerger exercise helps lift the plantation valuation from the previous range of 18 times to 20 times to the current level of 28 times to 30 times, which is more reflective of its substantial market share in the palm oil industry. In addition, a purer play plantation stock fetches higher valuation.

Sime Darby Plantations is the world’s largest oil palm plantation company with a total planted area of 602,454ha, spanning across Malaysia, Indonesia, PNG & Solomon Islands and Liberia.

It produces 2.48 million tonnes of crude palm oil (CPO) annually or about 4% of the total global CPO production.

It is a globally integrated plantation company, involving the entire span of the palm oil value chain, from upstream to downstream activities, research and development, renewables and agribusiness.

It is also involved in rubber and sugarcane plantations as well as cattle rearing. The upstream segment is the biggest earnings contributor to the group, making up more than 96% of the group’s earnings. The downstream segment accounted for the balance.

We think the current share price has fully reflected the muted CPO price performance.

We forecast a financial year ending June 30, 2018 (FY18) to FY20 earnings per share compound annual growth rate of 4%, taking into account an average CPO price of RM2,500 per tonne to RM2,550 per tonne.

The assumption is in line with our neutral stance on the plantation sector and current CPO price performance. Based on our sensitivity analysis, for every RM100 per tonne variance in CPO prices, Sime Darby Plantation’s bottom line would vary by 10% to 12%. — PublicInvest Research, Jan 4