This article first appeared in The Edge Financial Daily on April 24, 2018

Sime Darby Plantation Bhd
(April 23, RM5.57)
Maintain hold with a target price (TP) of RM5.35: We recently organised a one-day visit to Sime Darby Plantation Bhd’s (SD Plantation) estates under PT Aneka Intipersada in Pekanbaru to see and learn about the condition and development of the Indonesian operations. The weighted average age of SD Plantation’s palm trees in Indonesia is about 14 years, slightly older than the group’s average of about 13 years. Hence, some estates in Indonesia have started their replanting programme at a faster rate. This, together with certain areas in Kalimantan having not fully recovered from El Nino, caused its fresh fruit bunch (FFB) production in Indonesia for first half of financial year 2018 (1HFY18) to be lower by 5% year-on-year (y-o-y). Maintain “hold” on SD Plantation with an unchanged 12-month TP of RM5.35.

The weighted average age of the palm trees in Indonesia is about 14 years, slightly older than the group’s average of about 13 years. In particular, at the PT Aneka Intipersada estates that we visited, about 46% of the total palm trees within 9,656ha of planted area are aged between 19 years and 25 years. Hence, these estates have started a replanting programme at a higher rate of 4%-7% of the total planted area per annum, in order to be in line with the group’s target of reducing its average palm tree age to about 10 years by FY25.

For 1HFY18, SD Plantation’s Indonesia FFB yield was flat y-o-y at 8.91 megatonnes per hectare, lower than the 12.8 megatonnes per hectare in Malaysia and 9.76 megatonnes per hectare in Papua New Guinea. Indonesia’s 1HFY18 FFB production was down by 5% y-o-y to 1.44 million, partly attributable to smaller prime matured areas due to the aggressive replanting programme as well as certain estates in Kalimantan area not having fully recovered from the 2015-2016 El Nino phenomenon. The selection of high-quality planting materials, stringent culling process, and adoption of best estate management practices could potentially help improve the Indonesian production going forward.

There is no problem getting labour in Indonesia, but the rising minimum wage is a concern. As such, more mechanisation needs to be put in place at the Indonesian operations. Failure to do so could lead to a higher cost of production in Indonesia.

We make no changes to our FY18-FY20 core earnings per share (EPS) estimates and 12-month TP of RM5.35, which is based on an unchanged 25 times calendar year 2018 core EPS estimate. We maintain our “hold” rating on the stock. — Affin Hwang Capital Research, April 23