KUALA LUMPUR: Citi Research is retaining Sime Darby Plantation
as its top pick among the Malaysian plantation companies with a target price of RM6.29.
It values Sime Plantation at a price-to-earnings ratio (PER) of 29.0 times on the average of FY19/20E earnings, which is set at +1 standard deviation to the one-year forward mean PE of 28.5 times.
“The +1SD premium is in in-line with other large Malaysian planters. We choose a PER methodology to derive our target price which is consistent with the other planters.
“Our valuation implies an enterprise value/ hectare valuation of US$21,800 per ha. We believe investors should place a premium on Sime Darby Plantation’s growth prospects, through effective execution on replanting initiatives to lower the average age of palm trees, and also its potential to pay higher dividends with lower capex spend,” it said.
It issued the report after taking Sime Plantation on a non-deal roadshow to Singapore.
Citi Research said Sime Plantation has been busy with at least 20,000 ha of replanting in the past five years (30,000 ha 2017, 28,000 ha 2018). This intense replanting exercise has helped to reduce the weighted average age of its 600,000 ha plantations to 12.8 years.
The plantation company plans to continue with 30,000 ha of replanting each year, which will bring its weighted average plantation age to just 10 years by 2025.
“Sime Plantation has been much more aggressive than other large planters in replanting work, which implies renewed fresh fruit bunches production growth (after a few years with little FFB growth).
“The company now has the best age profile improvement amongst large planters and is the only planter showing an improvement in age profile amongst large planters,” it said.
Citi Research said Sime Plantation targets to improve its downstream segment (15%-20% of its profit pool) by improving access to local markets as well as improving its range of B2B specialty-oils/fats. Improved refinery access especially in Indonesia is also helpful given the wide discounting that now presents as a result of high local inventories across many parts of Indonesia.
“We believe the Indonesian government’s plan to include B20 for the non-PSO sector to curb fuel imports can offer some support to currently weak palm oil prices if well executed.
“Sime Plantation’s recent headline FY18 results had recurring PBIT declining by 9% year-on-year on weaker average crude palm oil and palm kernel prices; with lower finance expenses of RM183mil (-61% on-year) helping. Notably, net gearing has declined to 0.38 times (4Q17: 0.57 times) on reduced borrowings – it is now close to its target gearing zone of 0.3 times.
“Sime Plantation continues to look for a strategic partner for reduction of its stake in NBPOL. Greater scrutiny of all its assets/investments is progressing in order to drive higher returns for shareholders,” it said.
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