Date: 26 September 2024
Broker: UOB Kay Hian Securities (M) Sdn. Bhd.
Company Overview
SD Guthrie (SDG MK) is Malaysia’s largest oil palm plantation company, operating in various regions including Malaysia, Indonesia, Papua New Guinea (PNG), and Solomon Islands. It is involved in both upstream and downstream businesses, with a strong focus on sustainability and compliance.
Market Data:
- Share Price: RM4.88
- Target Price: RM4.75
- Market Cap: RM33,748.7 million
- 3-month average daily turnover: US$3.9 million
- Major Shareholders:
- Amanah Saham Nasional Bhd: 53.3%
- Employees Provident Fund Board: 16.3%
- Kumpulan Wang Persaraan Diperbadankan: 6.7%
Financial Highlights
For FY24, SD Guthrie is forecasted to face some challenges but is expected to deliver steady results:
- Net Turnover (2024F): RM21,628 million
- EBITDA (2024F): RM3,873 million
- Net Profit (2024F): RM1,451 million
- EPS (2024F): 21.3 sen
- Dividend Yield (2024F): 2.2%
In 1H24, SD Guthrie’s performance was driven by strong upstream results from its Malaysian estates, with challenges in its other regional operations. The company is expected to have a decent showing in 2H24, supported by seasonal production peaks and favorable crude palm oil (CPO) prices.
Upstream Business Performance
SD Guthrie’s plantation segment saw mixed results across its geographical regions in 1H24:
- Malaysia: Production grew significantly by 35% year-on-year, a recovery driven by the favorable weather and recovery from previous productivity challenges.
- Indonesia: Output decreased by 17% year-on-year, attributed to the effects of last year’s El Niño.
- Papua New Guinea/Solomon Islands: Output was affected by security issues and logistical challenges, especially in PNG, resulting in lower yields.
Overall, SD Guthrie recorded a fresh fruit bunch (FFB) growth of 8% year-on-year in 1H24 but is expecting moderate growth in 2H24 due to higher base effects.
Downstream Business Outlook
SD Guthrie’s downstream business had a relatively strong performance in Europe in 1H24, especially compared to its peers. However, its refineries in Indonesia struggled due to domestic trade measures, leading to slight losses.
The company sees a positive outlook for its downstream business in 2H24, especially in Indonesia, where relaxed palm oil export levies and reduced domestic supply requirements are expected to improve margins.
EUDR Compliance and First Shipment to Europe
SD Guthrie is positioning itself as a beneficiary of the European Union Deforestation Regulation (EUDR). The company announced the delivery of its first 40,000 tonnes of EUDR-compliant palm oil to Europe. This move highlights SD Guthrie’s commitment to meeting sustainability standards and could lead to price premiums in European markets.
The company is expected to benefit from incremental margins in the near term as European buyers may offer premiums for EUDR-compliant palm oil products, which can range between US$25-50 per tonne.
Environmental, Social, and Governance (ESG) Initiatives
Environmental:
SD Guthrie is working towards its carbon reduction target of 40% by 2030, currently achieving an 18% reduction. The company has announced plans to build additional biogas plants in Kedah and Negeri Sembilan to support this goal.
Social:
The U.S. Customs and Border Protection has cleared SD Guthrie’s palm oil production from concerns of forced or convict labor, reflecting the company’s commitment to ethical labor practices.
Governance:
SD Guthrie maintains transparent governance policies, including an Anti-Bribery and Anti-Corruption Policy to ensure compliance with legal and ethical standards.
Earnings Forecast and Valuation
SD Guthrie’s earnings forecast has been revised for FY24-26 as follows:
- FY24 Earnings Estimate: Reduced by 13% due to higher overhead costs, particularly for EUDR compliance and increased fertilization costs.
- FY25 and FY26 Earnings Estimate: Raised by 5% due to the expected positive impact of relaxed trade restrictions in Indonesia.
The broker has maintained a “Hold” recommendation for SD Guthrie, with a target price of RM4.75, based on a price-to-earnings (PE) ratio of 22x, which reflects improved market sentiment driven by SD Guthrie’s EUDR compliance efforts and diversification into renewable energy.
Risks and Challenges
- Operational Risks in PNG and Indonesia: Security issues in PNG and ongoing logistical challenges could continue to impact production in 2H24.
- Volatility in CPO Prices: While CPO prices are currently favorable, any downturn could affect profit margins, particularly in the downstream business.
- Higher Compliance Costs: Achieving full compliance with EUDR and other sustainability regulations could lead to higher operational costs over the next few years.
