Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with an unchanged fair value of RM4.55/share, based on FY24F PE of 18x, which is the 5-year average for big-cap planters. We ascribe a neutral 3-star ESG rating to SDP.

• SDP’s labour woes have eased. The group has enough workers in Malaysia and most of them have completed their training. Currently, SDP has an estate workforce of 27,000 in Malaysia, 31,000 in Indonesia and 10,000 in Papua New Guinea (PNG). As such, we think that SDP’s FFB production would improve by a stronger 6% in FY24F compared with 3.5% in FY23E. We understand that there are no major issues with the weather so far.

• On the back of a higher volume of CPO production and lower fertiliser costs, we estimate SDP’s cost of production (cost to customers) at RM2,300/tonne in FY24F vs. RM2,500/tonne in FY23E. We think that fertiliser costs would decline by 10%-20% in FY24F in line with global trends.

• We forecast downstream EBIT (trading, bulk and differentiated products) to rise by 25% to RM491mil in FY24F driven by positive demand and selling prices in Europe. We have assumed an EBIT margin of 2.5% in FY24F vs. 2% in FY23E.

• SDP is not expected to be significantly affected by EU’s deforestation regulation (EUDR), which will be implemented at the end of the year.

• SDP’s palm products, which are sold to the EU come mainly from PNG (Papua New Guinea). In PNG, SDP’s palm products are segregated balance RSPO-certified oil. This means that although the CPO are RSPO-certified, they come from different sources. Europe accounted for 21.3% of SDP’s revenue in FY22.

• We forecast SDP’s capex at RM2.5bil in FY24F vs. RM2bil in FY23E. The bulk of capex is expected to be for the replanting of ageing oil palm trees and a new palm refinery in Indonesia.

• SDP would be completing the construction of its palm refinery in North Sumatra at the end of FY24F. The refinery’s capacity is expected to be more than 450,000 tonnes per year.

• SDP is currently trading at a FY24F PE of 18x, which is higher than its 2-year average of 17x.

Source: AmInvest Research - 14 Feb 2024