By Xavier Kong
According to CIMB IB, Sime Darby Bhd is looking to replant close to 100ha of its palm oil plantation land with rubber, which could very well turn the group into a significant rubber producer in the next few years, should the replanting be successful.
This was revealed to analysts during a briefing with the managing directors of Sime Darby’s plantations and engineering and utilities (E&U) segments.
According to Franki Anthony Dass, managing director of the group’s plantations segment, the impact of El Nino on the group’s palm oil production will likely peak in the first quarter of 2016, though the effects could be felt for another 24 to 30 months. This, along with the rubber planting plan, brings the group to expect fresh fruit bunch yields to fall for two consecutive years in the group’s 2016 and 2017 financial years (FY16 and FY17).
“The impact is most severe in Kalimantan, while Papua New Guinea is feeling the impact of the dry weather for the first time,” noted AmResearch, adding that management had guided that Malaysia’s production could drop by 6%, and Indonesia by between 8% and 10%. Papua New Guinea could also see a decline, depending on the impact of the dry weather.
“However, overall production will still be up by around 5% in FY16, due to the acquisition of New Britain Palm Oil Ltd in March 2015. Should La Nina start in September 2016 and bring ideal rainfall to estates, future fresh fruit bunch yields may be boosted,” noted CIMB IB.
The group also expects higher crude palm oil prices of between RM2,500 and RM2,600 per tonne in the second half of financial year 2016, along with initiatives to reduce its costs of production, to mitigate the negative earnings impact from the lower output of fresh fruit bunches.
“Sime Darby hopes to bring down its current costs of production (excluding replanting) of RM1,300 per tonne to RM1,200 per tonne by lowering overheads and administrative costs,” said CIMB IB.
Sime Darby’s China E&U operations accounted for the bulk of the sub-segment’s profit before interest and tax in FY15, with the largest contributor, Weifang Port, increasing its throughput capacity to between 80 million and 85 million tonnes by mid-2017 from its current 25 million tonnes, through the construction of eight new berths at a cost of RM1.4 billion. This brings the group’s investment in its port operations in China to about RM3 billion.
“E&U China expects utilisation with the new capacity to be at 75% by 2019-2020. The current projections have not factored in a potential rail link from the main line to the port facilities,” noted AmResearch.
CIMB IB also noted that the slowdown in the Chinese economy has had minimal impact on Sime Darby’s port businesses in China as it focuses on domestic cargoes for local consumption.
At the same time, the group’s non-China E&U operations are exploring civil and mechanical engineering services opportunities across all sectors, according to AmResearch, including bidding for jobs at Petronas’ Pengerang Integrated Petroleum Complex project in Pengerang.
Pending the meetings with the group’s other segments, both AmResearch and CIMB maintained their respective “hold” recommendations. However, while AmResearch maintained its fair value of RM8, CIMB IB had dropped its target price to RM7.85 from a previous RM8.43 to reflect the lower fresh fruit bunch output assumptions due to El Nino.
At the noon close, Sime Darby’s shares were last traded at RM7.09, down 3 sen.
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