Positive on Sime Darby Plant’s prospects despite palm oil ban
KUALA LUMPUR: Analysts remain positive on Sime Darby Plantation Bhd’s (Sime Darby Plant) long-term prospects despite uncertainties on the potential European Union’s (EU) palm-based biofuels ban and the group’s pricey valuations.
The research arm of Hong Leong Investment Bank Bhd (HLIB Research) believed that Sime Darby Plantation’s near-term upside will be capped by uncertainties on EU’s potential move to ban palm-based biofuels by 2021 and its pricey valuations of financial year 2018-2019 (FY18-19) price-earnings (P/E) of 29.6-fold and 27.1-fold respectively.
“Nevertheless, we remain positive on its longer term prospects, underpinned by its accelerated replanting efforts (which will translate to higher oil yield over the longer term), and efforts to improve profitability at the downstream division,” HLIB Research said.
According to HLIB Research, Sime Darby Plantation’s aggressive replanting efforts – with over 140,000 hectares (ha) of oil palm plantation landbank being replanted since FY10 – have started bearing fruits.
This has been witnessed by a profit before interest and tax (PBIT) contribution of RM48 million in FY17.
HLIB Research reiterated the group’s “mission 25:25”, which is the average age of approximately 10 years with fresh fruit bunch (FFB) yield of 25 metric tonnes (mt) per ha and oil extraction rate (OER) of 25 per cent by 2025.
To achieve this, Sime Darby Plantation is embarking on accelerated replanting with high yielding planting materials with a replanting rate of five to seven per cent, mainly for Malaysian and Indonesian estates.
“Replanting aside, we note that Sime Darby Plantation is also working towards lower production cost, via further mechanisation, which will in turn lower labour and overhead costs, and increase palm productivity,” it said.
HLIB Research further noted that over the longer term, Sime Darby Plantation has plans to further increase PBIT margin and PBIT contribution from downstream division (to 20 per cent by FY25 from 5.2 per cent in FY17).
The research arm said that such targets would be achieved by shifting into high margin specialty products and deriving full value from certified sustainable palm oil (CSPO), through collaboration with smallholders and working towards fully segregated and traceable refineries.
While HLIB Research liked Sime Darby Plantation for the group’s established market presence and track record in the oil palm plantation industry, sound management team, and low equity value per ha which is relative to its large cap peers, the research arm believed near-term upside is capped by higher P/E valuations.