Sime Darby – This Too Shall Pass; Upgrade To BUY
RHB Research has upgraded the rating on this counter to ‘BUY’ from ‘Neutral’, with new target price (TP) of MYR2.60 from MYR2.40, 16% upside with c.4% yield.
Sime Darby’s 3QFY22 (Jun) results fell short of the Street’s estimates, being mainly weighed down by China and Australasia’s industrial units. China’s lockdowns will temporarily pressure motor sales, but it is believed it will rebound strongly thereafter. While its China industrial segment recovery is a way off, the Australasia industrial margin should normalise in FY23. The new ‘BUY’ call is in anticipation of China’s economic recovery, and a special dividend from sale of its healthcare unit.
SIME’s 9MFY22 core PATAMI of MYR816m missed analysts’ estimates, and accounted for 70% and 66% of full-year forecasts. The disappointment mainly stemmed from lower-than-expected industrial margins in China and Australasia. The motor division exceeded our estimates, on stronger-than-expected margins.
Results highlights. YoY, 3QFY22 core PATAMI fell 2.1%, mainly weighed down by the industrial unit – China’s industrial sales declined and margins weakened on continued stiff competition, while its Australasia margins fell on one-off COVID-19 expenses. The weaker industrial segment was offset by a strong motor division, which in turn was lifted by higher motor margins, likely due to supply tightness.
The research house trims FY22F earnings by 6% to account for softer industrial margins, but increase FY23-24F earnings by 2-3%, mainly fuelled by China’s motor and gradual industrial recovery. They set their TP to MYR2.60, which includes a 0%
ESG premium. Our BUY call is mainly premised on: i) A rebound in motor earnings in China post lockdowns, and ii) the IHH deal materialising with a special dividend distribution. While Beijing’s stimulus measures may eventually spur the industrial segment’s recovery, we think that it is still a way off. We opine that the current share price weakness is pricing in further
softness in China, giving investors an opportunity to capitalise on China’s eventual recovery. Key downside risks: Longer-than-expected lockdowns in China, softer-than-anticipated China recovery, weakness in coking coal prices, and lower-than-estimated industrial margins.
Kuala Lumpur Kepong – Decent Quarter Despite Indonesian Restrictions
Maintain ‘BUY’ call on KLK, with new TP of MYR34.15, from MYR31.45, 32% upside and c.5% FY22F (Sep) yield. Kuala Lumpur Kepong’s 1HFY22 results were above analysts’ estimates. It is expected earnings to post a stronger recovery in 2HFY22, given the upliftment of the export ban in Indonesia, and the higher CPO price environment. The company remains the most inexpensive big-cap planter, trading at 15x 2023F, at the low-end of its big-cap peers of 15-17x.
1HFY22 core net profit slightly beat. KLK’s core net profit came in slightly above our and consensus FY22F, at 53-56% of our and consensus expectations. This was mainly contributed by higher-than-expected ASPs as well as stronger.
KLK declared an interim DPS of 20 sen (1H21: 20 sen), in line with the research analyst’s FY22F expectations of 120 sen (or 55% net payout).
1HFY22 FFB production increased 26.8% YoY, while 7MFY22 output moderated slightly to +24.4% YoY – driven by the low base effect in FY21 and the IJMP consolidation. This is on track with management’s FFB growth guidance of +20% YoY for FY22 but below the analyst’s 30% growth assumptions. FFB growth assumptions are lowered for FY22 to 21.6% but keep our 5-7% growth forecasts for FY23-24.
Unit costs rose. Forecast unit costs are raised >20% QoQ and YoY in 1HFY22, on the back of rising fertiliser prices. This is in line withmanagement’s expectations of a 20-25% YoY in FY09/22 to MYR2,100- 2,200/tonne from MYR1700-1,800/tonne in FY21. KLK has tendered for its fertiliser requirements for 1HFY22 (at prices 5-10% higher YoY), while 2HFY22 pricing should be at least 50% higher YoY.
Downstream margins improved. The downstream segment saw a QoQ improvement in margins to 7.8% in 2QFY22 (from 5.2% in 1Q22), although 1HFY22 margins was lower YoY at 6.5% (from 7.3% in 1H21). KLK is still expecting sales volume to remain robust going forward, while utilisation rates remain high at 75-80%. Assuming management is able to achieve its more than 85% utilisation rate target in FY22, it is believed its downstream margins would improve on better economies of scale.
The earnings are revised up by 8-14% after imputing latest CPO price assumptions of MYR5,085/tonne for FY09/22 (from MYR4,350) and MYR4,550/tonne (from MYR3,775) for FY23.
Maintain BUY, with a higher TP of MYR34.15, after rolling forward valuation to 2023F, based on an unchanged 18x P/E for the plantation unit, 12x P/E for the manufacturing business, an 85% discount applied to the RNAV of its property landbank, and a 2% ESG discount given its score of 2.9. KLK remains the most inexpensive big-cap planter under their coverage, trading at 15x 2023F, at the low-end of its peer range of 15-17x.
Leong Hup International – To Capitalise On The Consumption Recovery
A ‘BUY’ call has been placed by the research house, with new MYR0.61 TP from MYR0.83, 20% upside.
Leong Hup International’s 1Q22 results disappointed, as the sharp rise in production costs could not be passed on immediately. That said, it is expected that margins to normalise going forward, as costs are gradually passed on, and higher consumption – from the broader economic reopening – should also support a quick earnings rebound. Also, it is believed LHI is in a good position to capitalise on the regional consumption recovery and potential industry consolidation, judging from its well established presence and solid fundamentals.
Results review. YoY, 1Q22 revenue jumped 25% on consumption recovery and higher ASPs to partially reflect the higher feed costs following the continuous rise in commodity prices. However, 1Q22 EBITDA fell 33% to MYR135m, with margin slipping by 5.5ppts, as the hike in commodity prices was too sharp (corn and soybean meal prices up c.30% QoQ) to be immediately passed on. As a result, most operating countries recorded material dips in EBITDA contributions. QoQ, 1Q22 revenue was 15% higher, but profitability was significantly dented by the hike in commodity prices which affected the livestock and feedmill businesses.
Effects of cost pass-through to be seen going forward. Following the subdued start to the year, the analyst anticipates a rebound in 2Q22F earnings, underpinned by the effects of the cost pass-through, and stronger consumption recovery from the better containment of the pandemic and the broader reopening of economies across its operating countries. In the longer run, there might be a consolidation in the regional poultry industry, as the extremely challenging operating environment caused by the pandemic and cost inflation should phase out the financially weaker players. This paves the way for larger-scale regional operators with solid fundamentals and robust expansion plans like LHI to extend its reach and gain market share. Current valuation may suggest that most of the negatives are already priced in, and we think LHI’s presence should place it in a good position to capture the region’s poultry consumption recovery.
Risks include further hikes in commodity prices and unfavourable regulatory changes.
