SIME Darby Plantation (SDP) is expected to generate strong earnings in the second half of this year on the back of higher crude palm oil (CPO) prices.
Additionally, the plantation heavyweight’s fresh fruit bunches (FFB) production growth from its Malaysian operation is likely to report improvement as it enters the seasonally high production period, according to AllianceDBS Research.
CPO price has strengthened 20% quarter-on-quarter (qoq) in the third quarter of this year (3Q 2020) to average RM2,747/metric tonne (mt) compared to an average price of RM2,283/mt in 2Q 2020.
“However, we gather that the recent high CPO prices will only partially benefit SDP’s FY2020 earnings as the company had sold forward its CPO products,” wrote analyst Siti Ruzanna Mohd Faruk.
“SDP sold forward its CPO products from Malaysia operation by four months, while CPO products from Indonesia and Papua New Guinea (PNG) by one month.”
Nevertheless, AllianceDBS Research still expects SDP to report better q-o-q and y-o-y results in 3QFY20 on the back of higher CPO price and FFB production.
Elsewhere, AllianceDBS expects sales volume from the company’s downstream operation to improve in its 2H FY2020 as many countries have gradually opened up their economies with India and China beginning to replenish their stocks in 3Q FY2020.
“We believe that SDP is more insulated than most FBM KLCI constituents from the (COVID-19) outbreak as palm oil demand will still thrive in the long run given it can be considered as an essential good,” justified Siti Ruzanna.
All-in, AllianceDBS Research has maintained its “buy” rating on SDP with an unchanged target price of RM5.80.
“We believe that SDP is in a good position to ride on higher y-o-y CPO prices as it has relinquished position in its Liberia assets while its operations in Papua New Guinea and Solomon Islands have seen improvements,” added Siti Ruzanna.
At 11.30am, the counter was down 7 sen or 1.41% at RM4.90 with 78,100 shares traded, giving it a market capitalisation of RM33.73 bil. – Oct 27, 2020
