Analysts see positive long-term productivity for Sime Darby Plantation
KUCHING: Sime Darby Plantation Bhd ( Sime Darby Pl a nt a t i on) lon g - t e rm productivity outlook has been viewed positively, driven by its high-yield planting material and technological improvements.
In its initiation report on the stock, the research arm of Kenanga Investment Bank Bhd ( Kenanga Research) believed think that long-term productivity outlook should be positive, implying a compounded annual growth rate (CAGR) of six per cent per year based on its crude palm oil (CPO) production estimates.
This comes with Sime Darby Plantation’s ‘Mission 25: 25’ aim of 25 metric tonne ( MT) per hectare ( ha) FFB production and 25 per cent oil extraction rate ( OER) target by year 2025.
“Our projections indicate the targets should be achievable, with estimated fresh fruit bunches (FFB) yield of 24.6MT/ha and OER of 24.8 per cent by 2025 through the use of high-yield planting material and technological improvements,” it said.
Meanwhile, the research team initiated its analysis on Sime Plant with a ‘market perform’ call, premised on its market leadership position, emphasis on sustainable palm oil production, FFB production recovery, research and development ( R& D) efforts and integrated operations, which it said, justifies the premium call on the stock.
“As the largest plantation company ( by planted area), Sime Plant ranks in the top three globally in milling capacity, FFB production and refining capacity as a premier palm oil player producing circa four per cent of global palm oil production.
“Ninety- eight per cent of its production is certified sustainable palm oil ( CSPO), affording it a pricing premium which we estimate at circa US$ 20 per MT or more depending on oil grade.
“As a fully integrated planter with both upstream plantations and downstream manufacturing, earnings are less affected by CPO price movements as lower CPO prices lead to lower downstream feedstock cost,” it explained.
Aside from that, it pointed out that Sime Darby Plantation is also showing signs of recovering from the ‘super El Nino’ weather.
In the aftermath of the severe droughts in 2015 to 2016, it noted that Sime Darby Plantation’s production was f lat in the financial year 2016 ( FY16) to FY17, leading to slow earnings recovery and high production cost per MT.
However, it pointed out, “Going forward, we expect yields to improve in line with the industry of circa eight per cent, for higher FY18 to FY19E FFB production of four to seven per cent.
“Given sector-wide production recovery, we expect its CPO prices to soften by 10 to six per cent to RM2,569 to RM2,417 per MT.
“We bel ieve that bet ter economies of scale and lower tax expense should lead to core net profit increasing by six to seven per cent to RM1.40 billion to RM1.49 billion in FY18 to FY19E.”