29 April 2010
Page 2 of 5
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Six key takeaways
from our recent visit: (1) Slower FFB production in Indonesia now; (2) longer-termFFB growth sustainable; (3) CPO price view unchanged; (4) Production costs to decline, but not assignificantly as seen in 1HFY10; (5) Property division picking up speed; and (6) Capex higher thanexpected.
Slower FFB production in Indonesia now.
In 9MFY06/10, Sime recorded FFB production growth of 3%yoy, on the back of improvement in FFB yields, particularly after the weak production caused by the wetweather in the previous year. However, we note that the rate of improvement is on a declining trend,especially in view of the fact that in 3QFY10, Sime’s FFB production fell 4.7% yoy and 27.9% qoq. This wasmainly attributed to a decline in yields in Indonesia, particularly in Feb 2010. We understand that in Feb,Indonesia’s production was down about 5% yoy (versus +10% yoy in Jan), while production in Malaysia fellapproximately 13% yoy (versus -10% yoy in Jan). Going forward, management is now guiding for adecline in FFB production of between 5-7% yoy for FY06/10 (versus the guidance of +5-8% yoy growth just two months ago), caused by the weather conditions as well as tree stress. Although this is significantlylower than our projected FFB growth forecast of 6.1% yoy for FY10, we continue to believe there will besome growth in FFB production in FY10, albeit at a smaller amount than our original assumptions, given therecovery in production seen in Mar 2010, of 21.2% mom. We are therefore revising our FFB productionforecasts downward to project a 1.8% yoy growth for FY10 (from 6.1% previously). For FY11-12, we arenow projecting FFB production growth of between 4.1-5.5% p.a. (from 4.2-4.4% previously), on the backof yield improvements in Indonesia, assuming normal weather conditions.
Longer-term FFB growth sustainable.
In the longer term, Sime expects future growth to come from anincrease in mature areas (as 10% of its planted landbank is immature) and an improvement in age profile(as close to 20% of its planted landbank is between 4-8 years in age). In Malaysia, Sime has unplantedlandbank of approximately 33,520ha, while in Indonesia, Sime has got unplanted landbank of about67,255ha (as at end-FY06/09). However, out of this unplanted landbank, only about 20,000ha is plantable(all in Indonesia), which Sime intends to fully plant up by end CY2010. Subsequently, Sime will concentrateon planting up its 220,000ha landbank in Liberia. Sime has already set up a nursery in the first phase of itsestate in Liberia, and has a long-term target of planting up 100,000ha in Liberia by 2015. By end-CY2010,Sime intends to plant up 10,000ha of land, and continue planting up 20,000-25,000ha per yearsubsequently. Development cost of the initial 10,000ha is estimated at RM60-70m, which includes the costof a CPO mill, and is to be spent over FY10-11. Excluding the mill cost, we estimate development cost to beapproximately RM20-30k/ha, which may seem on the high end versus Malaysian and Indonesian plantationdevelopment cost of RM12-15k/ha. However, we note that this cost would also include basic infrastructurecosts like roads, housing etc, which would be non-existent in Liberia, as well as ensuring the estatestandards are in line with RSPO guidelines. We note that the capex for this land development has alreadybeen included in our capex assumptions for FY10-11.
CPO price view unchanged.
Sime has not changed its CPO price view or its forward selling policy, andcontinues to sell up to 20% of its production three months forward. Given the currently higher price levels,we maintain our CPO price assumption of RM2,450/tonne for FY10.
Production costs to decline, but not as significantly as seen in 1HFY10.
Sime’s CPO production costin 1HFY06/09 was around RM1,000/tonne (excluding kernel credit), which was a 10% decline yoy.However, we believe this decline may not be sustainable in 2HFY10, due to the lower productivity seen inIndonesia recently, and the potentially higher labour costs. As such, we maintain our more conservativeprojection of a 5-6% p.a. decline in production costs in FY10.
Property division picking up speed.
The property division has picked up speed in the last quarter of FY06/10, in terms of property launches as well as sales of unsold stocks. We understand that up to Feb2010, property sales have already touched close to RM1bn, which is 80% of our FY10 sales projections.We, therefore, revise up our topline growth assumption for FY10 to reflect a 9.6% yoy growth (from 3.2%previously) for the property development division. Going forward, we believe there will be a strongerrecovery from FY11 onwards, as Sime’s property launches have resumed while property sales (especially inthe Klang Valley) have been very active of late. According to some media reports, Sime intends to launchone new property project a month for the next six months, which would include launches for its KLGCCtownhouses (GDV approximately RM200m for 120 units), residential units in Denai Alam, USJ Heights andBukit Jelutong. The latest phase of its Ara Damansara development, Seri Pilmoor, which has a GDV of RM469m, which was launched in Mar 2010, was sold out within 1.5 days. Sime targets to achieve property