Summary
SDG poised to benefit from long-term roll out of RE capacity, diversifying into a more sustainable recurring income stream.
Core earnings for FY24F-26F to grow by +46.9%/+8.9%/+12.2% led by i) recovery in FFB production, ii) robust CPO price which held steady at RM4,000/tonne throughout the year and iii) capacity expansion from Indonesia refinery.
We initiate coverage on SDG with a HOLD recommendation and TP of RM4.50 based on 21.7x PER pegged to FY25 EPS of 20.7 sen.
Investment Highlights
Growth underpinned by target FFB production of 9.3mMT/9.4mMT in FY24F/25F. We expect SDG to achieve a yoy FFB production growth of +6.5% yoy in FY24F, backed by mature planted palm oil land of more than c.500k-ha and better FFB yield at 18.5/ha (from 17.9/ha in FY23). We opined the recovery in FFB yield can largely be attributed to the improved availability of harvesters and higher fertiliser application in Malaysia. Moving into FY25F, we anticipate the Group’s FFB production moderating to 9.4m mt at+1.2% yoy, returning back to pre-pandemic production levels.
Revision in Indonesia palm oil policy to benefit exporters. The Indonesian government has updated export levies on CPO and palm derivatives, which we deem to be beneficial to regional planters like SDG. The new proposal aims to improve price competitiveness against other vegetable oils by simplifying levies to a flat rate of 7.5% for CPO, 4.5% for RBD Palm Oil and RBD Palm Olein, and 3% for biodiesel. This, along with the revision of Domestic Market Obligation (DMO) ceiling prices to IDR15,700/liter (from IDR14,000/litre), is expected to help SDG to generate savings of approximately 6-10% to the bottom line starting from FY25F onwards.
New refinery in Sumatra to come on stream in FY25F. SDG's Sei Mangkei refinery, boasting a capacity of 450,000MT, is set to commence operations in FY25F. The new refinery is mainly to cater for growing demand for specialty products, particularly, from Europe. Overall, we are positive on this development given that a tailored or differentiated product, such as margarine or specialty oil, tend to provide better yield as compared to bulk offering. We foresee increasing earnings contribution from downstream segment amidst growing demand from the European market in specialty products coupled with better selling price to meet its stringent requirement.
Opportunity in SDG’s massive plantation landbank. SDG is looking to diversify into the renewable energy sector by utilising its massive landbank of c.729k-ha. The Group's strategy can be divided into two main areas: i) play a bigger role as solar operator and ii) developing low yield plantation estate into industrial land. Notably, SDG has managed to secure a 15MW CGPP job from the government, taking its first step as a solar operator. While the initial contribution from this project is expected to be modest due to the scale, we anticipate earnings will rise significantly as SDG scales up to achieve its internal 1GW renewable energy capacity target. Growth is further bolstered by the co-development of the KIGIP industrial park, which includes a 660-ac of solar farm and Malaysia's first halal-certified industrial park in Negeri Sembilan.
Ready to weather through the EUDR hurdle. One of the biggest challenges for planters to comply with EUDR is to meet its stringent deforestation-free standards. In order to tackle this issue, SDG has implemented a robust traceability system, allowing it to track its palm oil back to its source. In FY23, the Group’s Traceability to Mill (TTM) stood at 96.2% (vs 94.8% in FY22), while Traceability to Plantation (TTP) stood at 73.9% (vs 72.7% in FY22). By enabling full traceability, SDG mitigates the risk of non-compliance with EUDR by ensuring that its palm oil does not contribute to deforestation or other environmental harms, thus protecting its access to the European market. To date, SDG is among the few palm oil planters capable of meeting the stringent European standards and has since started shipping its first EUDR-compliant palm oil in Sep 24.
Valuation & Recommendation
We initiate coverage on SDG with a HOLD recommendation and a target price of RM4.50 based on 21.7x 2025F PE. The PER assigned for valuation is +1 standard deviation above its 3-year forward average PE. The PER assigned is at a premium to prevailing valuations of large-cap plantation stocks, which now trade around 18.4x in FY25F. We believe the premium against peers is justifiable given its position as the largest oil palm plantation company in the world coupled with its strategic landbank in Malaysia.
Overall, we favour SDG for its prudent management, judging from the consistent performance posted by the group for the past few years as well as management move to optimize less productive land. Looking forward, we opine that the catalyst for the stock lies onto SDG diversification into the solar business by unlocking its substantial landbank potential.
Disclaimer
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Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of Apex Securities Berhad and are subject to change without notice. Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.449296 | 4.484012 |
| EUR | 4.692599 | 4.701308 |
| CNY | 0.615732 | 0.616932 |
| HKD | 0.571606 | 0.576092 |
| SGD | 3.310067 | 3.336427 |