KUALA LUMPUR (Oct 9): Citi Research is maintaining Sime Darby Plantation Bhd (SDPL) as its top pick among Malaysian planters with a target price of RM6.29.

In its research note, Citi Research said it valued SDPL at a price-to-earnings ratio (PER) of 29 times on the average of 2019/2020 financial year estimate earnings, which is set at +1 standard deviation to the one-year forward mean price earnings of 28.5 times.

"The +1 standard deviation premium is in line with other large Malaysian planters. We choose a PER methodology to derive our target price which is consistent with the other planters," it added.

Citi Research said its valuation implies an enterprise value of US$21.800 per hectare.

"We believe investors should place a premium on SDPL’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 capital expenditure spend," it added.

Citi Research said SDPL has been busy with at least 20,000 hectares of replanting over the past five years and the intense replanting exercise has helped to reduce the weighted average age of its 600,000-hectare plantations to 12.8 years.

"SDPL plans to continue with 30,000 hectares of replanting each year, which will bring its weighted average plantation age to just 10 years by 2025.

"SDPL has been much more aggressive than other large planters in replanting work, which implies renewed fresh fruit bunch (FFB) production growth after a few years with little FFB growth," it added.

Citi Research said SDPL now has the best age profile improvement amongst large planters, being the only planter showing an improvement in age profile amongst large planters.

SDPL also targets to improve its downstream segment by 15-20 per cent of its profit pool by improving access to local markets as well as improving its range of business-to-business specialty oils/fats, it added.

It noted that improved refinery access, especially in Indonesia, has also been helpful given the wide discounting 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 (Public Service Obligation) sector to curb fuel imports can offer some support to currently weak palm oil prices if well executed," said Citi Research.

At 12pm, SDPL was traded one sen higher at RM5.26.