CGS has initiated coverage on SD Guthrie Berhad (SDG) with an Add rating and SOP-based TP of RM5.20, equivalent to 23.6x 2025F P/E, which is below its 5-year historical mean. The Add rating it said is supported by the projections of a fresh fruit bunch (FFB) yield recovery, stable to high CPO prices, and lower production costs.

The house believes the current valuation is reasonable in light of the strong recovery in net profit and projects over the next two years. Key downside risks include: i) weather negatively impacting production growth, and ii) stronger-than-expected competition from Indonesian downstream players.

Yield recovery to boost productivity
CGS expects 5% yoy fresh fruit bunch (FFB) production growth for 2024-25F. For 2024F, the growth is primarily driven by strong double-digit recovery from its Malaysian estates following the filling of vacant harvester positions and ongoing rehabilitation activities.

However, this will be partially offset by declines at its Indonesia and Papua New Guinea (PNG) estates due to weather challenges. As for 2025F, we believe production growth will come on the back of better FFB yields at its Indonesia estates as they recover from the El Niño impact while FFB yields for its Malaysia estates should return to normal after the completion of rehabilitation works and sufficient skilled labourReaping the benefits of high CPO prices

CGS also said it is positive on SDG's net profit growth outlook on the back of its average CPO price forecast of RM4,000/tonne for 2024F and 2025F (2023: RM3,810) and improving yields. The house expects a net profit CAGR of 53% for 2023-25F on the back of production growth from FFB yield improvements and high CPO prices. SDG has the largest oil palm planted area among all the listed plantation companies in Malaysia (total planted area 568,323 ha as of 2023), every 5% increase in CPO price will lift SDG's net profit by 23% for FY25F, based on their sensitivity analysis.

Unlocking shareholder value with new ventures
The house thinks re-rating catalysts for SDG could come from: a) its monetisation plan from its non-strategic/non-core assets (especially rubber land) with an annual proceeds target of RM500m-700m, which may lead to higher dividend payouts, and b) expansion into solar energy, with SDG investing in three sites under the Fifth Large Scale Solar programme (LSS5) and aiming for 1GW of renewable power capacity, with a potential investment of RM2.5bn