Higher CPO prices to support SDP H2 earnings
25/08/2023 (The Star Online), Petaling Jaya - Analysts are split on the prospects of Sime Darby Plantation Bhd (SDP), with some citing their concerns on the planter’s earnings for the first half of financial year 2023 (1H23), which are below consensus estimates.
Having said that, they expect higher crude palm oil (CPO) prices in the latter half of the year to lend some support.
Kenanga Research, in a note to clients yesterday, said SDP’s 1H23 core net profit of RM338mil, which was 72% lower year-on-year, nonetheless outperformed its expectations by fulfilling 67% of the full-year forecast.
However, the research house said the planter’s core net profit only made 32% of the consensus full-year estimate.
Kenanga Research noted that “the performance for 1H23 was generally weaker across upstream and downstream largely on softer palm oil prices and higher costs.
“SDP’s adjusted core net profit for the second quarter (2Q23) was RM122mil lower than the reported net profit, mainly due to unrealised currency losses of RM51mil, and unrealised commodity losses of RM18mil which was offset by a disposal gain of RM191mil.”
With global edible oil supply improving along with demand, the research house added inventory levels worldwide were not rising significantly.
As such, Kenanga Research expects CPO prices to stay firm, averaging around RM3,700 per tonne for this year and the next.
On a brighter note for SDP, Kenanga Research said fertiliser and fuel costs have been weakening year-on-year (y-o-y), which should translate to a lower production cost moving into 2H23.
“The labour shortfall in Malaysia has largely been addressed, so the harvest should improve in the coming months. Altogether, the CPO cost, while still high, should ease in 2H23,” it said.
Meanwhile, the research house maintained a cautious stance on SDP’s elevated cost base, which could drag long-term profits and returns. Hence, it has kept an “underperform” call on the counter.
Maybank Investment Bank (Maybank IB) Research said SDP’s core net profit for 1H23 had missed estimates, but is anticipating core net earnings in 2H23 to improve from the first half of the year, driven by better output and lower costs.
The brokerage said headline earnings for the plantation group in the second half of the year should also be boosted by land disposal gains of approximately RM653mil.
Maybank IB Research also noted SDP’s fresh fruit bunch (FFB) output for 1H23 had met 45% of its full-year forecast.
Therefore, the group is on track to deliver its 10% y-o-y FFB growth target for 2023.
The brokerage, which has maintained a “hold” call on SDP, has advised investors to look at other plantation counters for the time being.
Meanwhile, UOB Kay Hian Research said SDP’s core net profit for 1H23 came in within its expectations, thanks to the plantation company’s downstream contribution with higher margins, especially in Europe, which offset the loss in its loss-making upstream business in Malaysia.
The research house also expects SDP to record strong earnings in 2H23 on the back of stronger margins with higher production, increased CPO prices and reduced production costs. Buoyed by these factors, it has kept a “buy” call on SDP, with a target price of RM5 per share.