During SDG's 9MFY24 results briefing, it was indicated that SDG will treat industrial property development and renewable energy (RE) as new "core" or operating verticals. Meanwhile, SDG is expecting firm CPO prices until mid-FY25 along with recovering FFB yield into next year. As such we are nudging up FY24-25 core net profit (CNP) by 2-4%, respectively, but keeping our TP of RM4.60 and MARKET PERFORM call intact.

Key highlights from SDG's 9MFY24 results briefing were as follow:

1. Upstream - better 4Q earnings likely on firmer CPO prices of RM4,500 per MT was guided by management. Consequently, we are raising our average CPO price for FY24 from RM4,000 to RM4,100 per MT. The group's 4Q FFB harvest is usually 1-3% weaker QoQ but for FY24, 4Q FFB should hold steady thanks to a later than usual harvest peak in Oct rather than Aug; full-year FY24 output would be around 8.7m MT, i.e. flat YoY as estimated by Kenanga. For FY25, FFB production is expected to recover by 3% to 9.0m MT.
2. Downstream - to improve but staying subdued. European demand for stricter sustainable edible oil should ease in 4Q given a 12-month delay in the introduction of the EU Deforestation Regulation (EUDR) till end of FY25 but staying healthy nonetheless. In Asia, downstream competition is set to stay intense due to excess capacity is SE Asia but overall demand should still inch up though not very much.
3. New property vertical. Effective 4Q, industrial property development and renewable energy (RE) will be new operating verticals for the group, contributing recurring earnings to the bottom line. Industrial property development vertical will cover the (a) 1,000-acre Kerian Integrated Green Technology Park (KIGIP) being studied with parent PNB, (b) co-development of 464-acre with TH Properties at the latter's "techpark@enstek" near KLIA, and (c) JV with AME Elite Consortium Bhd (Non-Rated) to develop 641 acres of green industrial park in Kulai which will be part of the new core. However, instead of incurring 10% capital gains tax when sold into the shared or JV entity, SDG may suffer normal 24% corporation tax.

New RE vertical will include its own 15MW CGPT solar farm being constructed, ongoing LSS5 bids and future connection of its biogas plants to the national electricity grid. Development of solar farms beside KIGIP and Kulai green park are also being studied.

Forecasts. We area nudging up core FY24-25F net profit by 2-4%, respectively, as we fined tune our CPO and FFB production expectations.

Maintain MARKET PERFORM and TP of RM4.60 based on 1.6x PBV, a discount to average 2x for large integrated peer due to SDG's lower 5-year average ROE of 8% vs. 10% of its peers. Efforts to broaden its core activities into industrial property development and RE are commercially sensible and should push ROE closer to peers.

Nevertheless, such efforts take time (2-3 years or beyond) and face execution risks. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3) With some of its estates ripe for property development, SDG is defensive and undervalued from an asset point of view but long-term expansion plans and productivity management strategies would be viewed positively. The timing and actual impact on earnings are less clear; hence, we are keeping our MARKET PERFORM call.

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 PK prices, and (iv) cost inflation particularly fertilisers.

Source: Kenanga Research - 22 Nov 2024