Sime Darby Plantation Welcoming The Pure FBMKLCI Planters

29 November 2017 Initiate Coverage Sime Darby Plantation Welcoming The Pure FBMKLCI Planters Initiate with NEUTRAL Target Price (TP): RM5.60 INVESTMENT HIGHLIGHTS Pure plantation company post demerger Aims to improve efficiency by achieving Mission 25:25 Expect FY18 core earnings of RM1.17b Net gearing should improve in FY18 and FY19 Initiate with NEUTRAL call and TP of RM5.60 Pure plantation company post demerger. As a result of the completion of Sime Darby Berhad Pure Play, Sime Darby Plantation Berhad (SIMEPLT) earnings is now 99% exposed to Oil Palm related activity. In FY17, Upstream plantation contributed 94% of the Group s operating profit and this is followed by Downstream s 5%. SIMEPLT is also the world s largest oil palm plantation company (by planted area) with 602,454 ha of planted areas. Aims to improve efficiency by achieving Mission 25:25. Under its Mission 25:25, SIMEPLT aims to achieve Fresh Fruit Bunch (FFB) yields of 25 MT per Ha and 25% Oil Extraction Rate (OER) by the year 2025. For the Downstream segment, SIMEPLT aims to improve its operating profit contribution to 20% of the Group s within the next 5 years (as compared to FY17 s 5.1%). Expect FY18 core earnings of RM1.17b. Key assumptions are average CPO price of RM2863 per tonne and FFB volume of 10.13m tonnes. For FY19, we core net profit forecast is RM1.21b assuming average CPO price of RM2900 per tonne and FFB volume of 10.28m tonnes. Net gearing should improve in FY18 and FY19. We expect SIMEPLT net gearing to decline to 0.40x by end-fy18 and 0.33x by end- FY19. As of end-fy17, the net gearing is at 0.48x. The decline in net gearing is mainly caused by the strong operating cash flow from its plantation business. We expect SIMEPLT to be in a comfortable position to achieve its 50% dividend policy which will translate to dividends of 8.57 sen in FY18 and 8.89 sen for FY19. Initiate coverage with a NEUTRAL recommendation and a Target Price of RM5.60. Our Target Price is based on the average Target Price derived from Price To Earnings (PE) and Price To Book (PB) methodology. By using the PE methodology, we derive the Target Price of RM4.71 by applying 26.5x Target PE on FY19 EPS estimate of 17.78 sen. By using the PB methodology, we derive the Target Price of RM6.48 by applying 3.0x Target PB on SIMEPLT Book Value of RM2.16. Refer Page 7 for the details of the valuation. RETURN STATS IPO Price Target Price Expected Share Price Return RM5.59 RM5.60 +0.1% Expected Dividend Yield +1.5% Expected Total Return +1.6% STOCK INFO KLCI 1720.38 Bursa / Bloomberg Board / Sector Syariah Compliant 5285 / SDPL MK Main/ Plantation Yes Issued shares (mil) 6800.8 Market cap. (RM m) 38016.7 Price over NA 2.59 Major Shareholders (%) Skim Amanah Saham Bumiputera 40.44 EPF 11.09 Yayasan Pelaburan Bumiputra 5.78 KWAP 5.54 MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures

INVESTMENT STATISTICS FYE Jun (RM m) FY15A FY16A FY17A FY18F FY19F Revenue 10,304.0 11,946.5 14,779.4 15,951.6 17,234.3 EBIT 1,570.9 1,268.0 4,537.9 1,985.7 2,019.8 PBT 1,315.9 839.0 4,031.0 1,620.2 1,672.2 Net Income 997.1 967.2 3,507.1 1,165.5 1,209.4 Core Net Income 696.6 962.6 944.4 1,165.5 1,209.4 EPS (sen) 14.66 14.22 51.57 17.14 17.78 Core EPS (sen) 10.24 14.15 13.89 17.14 17.78 DPS (sen) NA NA NA 8.57 8.89 Net Dvd Yield NA NA NA 1.5% 1.6% PER 38.1 39.3 10.8 32.6 31.4 Core PER 54.6 39.5 40.3 32.6 31.4 NTA/share (RM) 0.92 0.99 1.71 1.97 2.24 P/NTA 6.10 5.64 3.26 2.84 2.50 ROE (%) 11.2% 10.1% 23.9% 7.1% 6.6% ROA (%) 3.6% 3.4% 11.9% 3.8% 3.7% Source: Company, Forecast by MIDF Research A. INVESTMENT MERITS World s largest planter by planted area. SIMEPLT is the world s largest oil palm plantation company (by planted area). The Company s landbank spread across 602,454 ha of planted areas in Malaysia, Indonesia, Liberia, Papua New Guinea and Solomon Islands. SIMEPLT is also the world s largest producer of Certified Sustainable Palm Oil (CSPO), with around 20% market share of the world production. In FY17, SIMEPLT produced 2.48m tonnes of Crude Palm Oil (CPO) which is equivalent to around 4% of total global production. Exhibit 1: SIMEPLT is the largest planter in the world by planted area 2

Aims to improve efficiency by achieving Mission 25:25. Under its Mission 25:25, SIMEPLT aims to achieve Fresh Fruit Bunch (FFB) yields of 25 MT per Ha and 25% Oil Extraction Rate (OER) by the year 2025. To achieve this, the Company plans to implement the best agronomic practices supported by high-yielding planting materials, technology and management. Exhibit 2: SIMEPLT Historical FFB Yield Source: Company Exhibit 3: SIMEPLT Historical OER Source: Company To increase Downstream segment contribution to 20% in the next 5 years. In FY17, Downstream division contribution for operating profit is RM232.7m or 5.1% of the Group s operating profit. SIMEPLT aims to improve the Downstream segment contribution to 20% of the Group s within the next 5 years. To achieve this, SIMEPLT will focus on differentiated, sustainable and traceable products to serve its customers evolving needs. The Company also plans to explore and expand opportunities to increase our presence in key geographical markets such as India, Southeast Asia, the United States, Europe, Africa, the Middle East and China. 3

B. FINANCIAL HIGHLIGHTS Upstream, Downstream and Others. Sime Darby Plantation (SIMEPLT) is mainly involved in the upstream plantation (Upstream), palm oil downstream business (Downstream) and others (Others). In FY17, Downstream revenue contribution is the highest at RM11.08b or 75.0% of SIMEPLT total revenue. This is followed by Upstream (RM3.64b revenue or 24.6% contribution) and Others (RM60.0m or 0.5% contribution). Despite the high revenue contribution, Downstream division contribution for operating profit is lower at RM232.7m or 5.1% of the Group s operating profit. The highest operating profit contributor is Upstream with RM1.81b (or 94.3% of the Group s). Exhibit 4: SIMEPLT revenue breakdown by segment Exhibit 5: SIMEPLT operating profit breakdown by segment 4

Upstream the high margin business. Despite contributing only 20.8% to 28.0% of total Group s revenue in the past three years, the plantation segment contributed 79.0% to 94.3% of the Group s operating profit. This is mainly caused by the higher margin of upstream business which range from 15.1% to 23.9% in the past three years. In FY17, Upstream core operating profit margin is 20.2% and this is higher than Downstream s 2.1% and Others 9.1%. We believe that the high margin of upstream business is caused by limited area of land suitable for oil palm plantation globally as oil palm can only be grown at areas within 10 degrees of North or South of the Equator. Exhibit 6: Upstream core operating profit margin World s largest planter by planted area. SIMEPLT owns a total landbank of 983,528 ha out of which 602,454 ha is planted with oil palm. The Company s oil palm estates are located in Malaysia, Indonesia, Papua New Guinea (PNG) and the Solomon Islands, and Liberia. The Company average age profile is 13 years old and the Company plans to lower down its average age profile to 10 years by the year 2025. Besides oil palm plantation, SIMEPLT also owns rubber and sugarcane plantations and operates the mill for FFB and Palm kernel processing. It is also involved in rubber processing and sugar milling. Exhibit 7: Age profile of SIMEPLT 5

Downstream a highly competitive business. Despite contributing 71.4% to 78.6% of total Group s revenue in the past three years, the downstream segment contributed only 4.4% to 17.4% of the Group s operating profit. This is mainly caused by the low margin of downstream business as it is operating in a highly competitive business environment. Having said that, the exposure to downstream business is important for big cap planters as it limits the earnings downside during the period of low CPO price. Exhibit 8: Downstream core operating profit margin Net gearing should improve in FY18 and FY19. We expect SIMEPLT net gearing to decline to 0.40x by end-fy18 and 0.33x by end-fy19. As of end-fy17, the net gearing is at 0.48x. The decline in net gearing is mainly caused by the strong operating cash flow from its plantation business. We also expect low capex as we do not think that SIMEPLT will expand its landbank soon as the focus in the near term is for replanting. All in, we expect SIMEPLT to be in a comfortable position to achieve its 50% dividend policy which will translate to 8.6/8.9 sen in FY18/FY19. Expect FY18 core earnings of RM1.17b. We expect SIMEPLT to register core net profit of RM1.17b in FY18. Key assumptions are average CPO price of RM2863 per tonne and FFB volume of 10.13m tonnes. For FY19, we core net profit forecast is RM1.21b assuming average CPO price of RM2900 per tonne and FFB volume of 10.28m tonnes. C. SECTOR OUTLOOK Positive on the plantation sector. We are positive on the plantation sector as we expect strong demand for palm oil in 2018 with supply growth to weaken. Besides that, we believe that South America soybean production should decline in 2018. All these factors should continue to support good CPO price and we expect average CPO price of RM2900 for 2018. October inventory is within expectation. Malaysia palm oil inventory level of 2.19m MT as of end-october 2017 is close to market expectation of 2.20m MT. However, it is higher than our estimate of 2.09m MT as production came in stronger than expected. Note that October production increased by 13% mom against our expectation of 3% increase. Against last month, inventory level increased by 8% as production growth of 13% exceeded export volume growth of 2%. Against same period last year, inventory is higher by 39% (against September s increase of 31% yoy). 6

D. VALUATION Initiate coverage on SIMEPLT with a NEUTRAL recommendation and a Target Price of RM5.60. Our Target Price is based on the average Target Price derived from Price To Earnings (PE) and Price To Book (PB) methodology. By using the PE methodology, we derive the Target Price of RM4.71 by applying 26.5x Target PE on FY19 EPS estimate of 17.78 sen. By using the PB methodology, we derive the Target Price of RM6.48 by applying 3.0x Target PB on SIMEPLT Book Value of RM2.16. PE Valuation Target Price of RM4.71. The 26.5x Target PE is based on the average Target PE used for IOICORP and KLK. We believe that these two companies are the closest comparison for SIMEPLT due to: i) their exposure to Oil Palm Upstream and Downstream division and ii) both are members of FBMKLCI. PB Valuation Target Price of RM6.48. The 3.0x Target PB is based on the average Price To Book Value of IOICORP and KLK. We believe that SIME PB should appreciate from its current level of 2.6x as its aims to achieve: i) FFB yields of 25 MT/ha by 2025, ii) OER of 25% by 2025 and iii) 20% EBIT contribution from the downstream division in the next five years. Overall Target Price is RM5.60. Exhibit 9: Price To Earnings Valuation Method Value Note Target PE 26.5 Average of IOICORP's 26.3x and KLK's 26.8x FY19 EPS 17.78 Fair Value, RM 4.71 Source: MIDF Research estimate Exhibit 10: Price To Book Valuation Method Value Note Target PB 3.0 Average of IOICORP's 3.76x and KLK's 2.25x Book Value per share 2.16 Fair Value, RM 6.48 Source: MIDF Research estimate Exhibit 11: Key segments of SIMEPLT peers Company Key Segments Operating Profit Contribution from Upstream and Downstream SIMEPLT Upstream, Downstream and Others 99% IOICORP Upstream, Downstream and Others 99% KLK Upstream, Downstream, Property and Others 93% Source: Companies, MIDF Research 7

E. RISKS CPO price volatility. As Upstream division is the biggest earnings driver for SIMEPLT, the movement in CPO price is expected to affect SIMEPLT earnings significantly. For every RM100 change in CPO price, we expect SIMEPLT FY18 and FY19 core earnings to move in the similar direction by 11.4% and 11.3% respectively. Downstream division margin may fluctuate due to volatile input costs. SIMEPLT s downstream division use CPO and Palm Kernel as their main inputs. The operating profit margin may be affected if the price of CPO and Palm Kernel increased significantly over a short period as SIMEPLT may not be able to fully pass on its higher input cost. F. FINANCIAL FORECAST Income Statement (RM m) FY15A FY16A FY17A FY18F FY19F Balance Sheet (RM m) FY15A FY16A FY17A FY18F FY19F Revenue 10304.0 11946.5 14779.4 15951.6 17234.3 PPE 17137.3 18002.2 18339.6 19913.8 21487.9 EBIT 1570.9 1268.0 4537.9 1985.7 2019.8 JV 511.8 551.3 479.7 479.7 479.7 PBT 1315.9 839.0 4031.0 1620.2 1672.2 Associates 141.4 132.9 129.1 129.1 129.1 Net Profit 997.1 967.2 3507.1 1165.5 1209.4 Intangibles 2676.2 2846.4 3039.2 3039.2 3039.2 Core Net Profit 696.6 962.6 944.4 1165.5 1209.4 Deferred Tax Assets 152.9 580.1 640.8 640.8 640.8 Core EPS (sen) 10.24 14.15 13.89 17.14 17.78 Others 1420.9 1619.9 1166.1 1138.3 1122.1 Core PER (x) 54.6 39.5 40.3 32.6 31.4 Non-current Asset 22040.5 23732.6 23794.5 25340.9 26898.8 Net DPS (sen) 0.0 0.0 0.0 8.6 8.9 Cash 1102.4 636.3 713.4 696.7 785.6 Net Dvd Yield 0.0% 0.0% 0.0% 1.5% 1.6% Inventories 1340.9 1505.0 1521.8 1595.2 1637.3 Cash Flow Statement (RM m) FY15A FY16A FY17A FY18F FY19F Receivables 2483.8 2274.9 2558.1 2711.8 2843.7 PBT 1031.4 1002.9 3551.9 1210.3 1254.2 Others 512.8 284.4 683.4 683.4 683.4 Depreciation 745.0 1054.3 1167.4 1225.1 1260.8 Current Asset 5439.9 4700.6 5476.8 5687.0 5949.9 Working cap changes 327.7-144.3 477.5-245.0-205.2 Asset held fo safe 10.7 3.9 183.6 0.0 0.0 Cash Tax Paid 284.5-163.9 479.1 409.9 418.1 TOTAL ASSETS 27491.2 28437.1 29454.9 31027.9 32848.8 Gain On Disposal -300.5-4.6-2562.7 0.0 0.0 Share capital 600.0 600.0 600.0 600.0 600.0 Others -115.1 52.5 178.9 100.0 100.0 Reserves 8305.2 8992.2 11858.1 13606.3 15420.3 Cash from Operations 1973.0 1796.9 3292.1 2700.2 2827.8 Minority Interest 560.8 455.0 433.9 433.9 433.9 Perpetual Sukuk 0.0 0.0 2231.4 2231.4 2231.4 Acquisition of subsidiary -5998.2 0.0-106.7 0.0 0.0 TOTAL EQUITY 9466.1 10047.1 15123.4 16871.5 18685.6 Capex -1108.5-1297.2-1574.2-1574.2-1574.2 Borrowings 3592.0 4552.0 6412.5 5912.5 5412.5 Sale of PPE 331.7 33.3 155.0 0.0 0.0 Others 3441.0 10308.4 2893.4 2893.4 2893.4 Others -16.7 128.9-51.8 0.0 0.0 Non-current liabilities 7033.0 14860.4 9305.9 8805.9 8305.9 Cash from Investment -6791.6-1135.0-1577.6-1574.2-1574.2 Borrowings 1184.7 970.4 1325.4 1325.4 1325.4 Payables 1837.2 1615.1 1772.7 1754.7 1723.4 Debt Raised/(Repaid) 5290.9-313.5-713.3-500.0-500.0 Others 7970.3 944.0 1912.1 2270.4 2808.4 Equity Raised/(Repaid) 0.0 0.0 0.0 0.0 0.0 Current liabilities 10992.2 3529.6 5010.2 5350.5 5857.3 Div Paid -600.0-700.0-900.0-582.7-604.7 Liability - asset for sale 0.0 0.0 15.4 0.0 0.0 Div Paid to Min Interest -64.5-176.7-60.0-60.0-60.0 TOTAL LIABILITIES 18025.1 18390.0 14316.1 14156.4 14163.2 Cash from Financing 4626.4-1190.1-1673.4-1142.8-1164.7 Change in Cash -192.2-528.2 41.0-16.7 88.9 Ratios FY15A FY16A FY17A FY18F FY19F Cash C/F 1189.3 1102.4 636.3 713.4 696.7 Return on Equity 11.2% 10.1% 23.9% 7.1% 6.6% Forex Diff on Open Bal 105.3 62.1 36.1 0.0 0.0 Return on Assets 3.6% 3.4% 11.9% 3.8% 3.7% Ending Cash 1102.4 636.3 713.4 696.7 785.6 Net Gearing 0.41 0.51 0.48 0.40 0.33 Source: Companies, MIDF Research 8

G. APPENDIX Exhibit 12: Board Of Directors Profile Management Tan Sri Dato A. Ghani Othman Tan Sri Dato Seri Mohd Bakke Salleh Dato Mohamad Nasir Ab. Latif Dato Mohd Nizam Zainordin Mr.Zainal Abidin Jamal Tan Sri Datuk Dr. Yusof Basiran Datuk Zaiton Mohd Hassan Mr. Muhammad Lufti Dato Che Abdullah @ Rashidi Che Omar Ms. Tan Ting Min Source: Company Profile Tan Sri Dato A. Ghani Othman is the Chairman and Non-Independent Non- Executive Director of SIMEPLT. He served as the Chief Minister of Johor from March 1995 to May 2013. He was appointed to SIMEPLT Board and the board of directors of Sime Darby Berhad on 1 July 2013. Tan Sri Dato Seri Mohd Bakke Salleh is the Executive Deputy Chairman and Managing Director. He served as the Group Managing Director and CEO of Lembaga Tabung Haji from 2001 to 2005. In December 2005, he was appointed the Group Managing Director of Felda Holdings Berhad and subsequently the Group President and CEO of Felda Global Ventures Holdings Berhad in January 2009. He was also an SC Commission member from 2004 until 2010. He was appointed the Acting President and Group Chief Executive of Sime Darby Berhad on 15 July 2010 and later assumed the position of President and Group Chief Executive on 27 November 2010, a position he held until 20 November 2017. He was appointed to the board of directors of Sime Darby Berhad on 16 November 2010 and to SIMEPLT Board on 30 December 2010. He resigned from the board of directors of Sime Darby Berhad and assumed the position as SIMEPLT Executive Deputy Chairman and Managing Director on 21 November 2017. Dato Mohamad Nasir Ab. Latif is SIMEPLT Non Independent Non-Executive Director. He started his career with EPF in 1982 and is currently the Deputy CEO of the Investment Division of EPF. Dato Mohd Nizam Zainordin is SIMEPLT Non Independent Non-Executive Director. He joined PNB since 1994 and is currently the Deputy President and Group CFO of PNB. Zainal Abidin Jamal is SIMEPLT Non-Independent Non-Executive Director. He is currently the Chairman of Maybank Islamic Berhad. Tan Sri Datuk Dr. Yusof Basiran is SIMEPLT Independent Non-Executive Director. He was formerly the CEO of the Malaysian Palm Oil Council from 2006 to January 2017. He was appointed to our Board on 31 December 2010. He is currently the Chairman of CB Industrial Product Holding Berhad (listed) since 2006, as well as a board member of SDB (listed) since 2010 and Bank Negara Malaysia since 2015. Datuk Zaiton Mohd Hassan is SIMEPLT Senior Independent Non-Executive Director. She is currently the CEO of Malaysia Professional Accountancy Centre (MyPAC) since 2016. Mr. Muhammad Lutfi is SIMEPLT Independent Non-Executive Director. He is the President Commissioner (i.e. Chairman of the Board of Commissioners which is responsible for supervising the board of directors) of PT Medco Energi Internasional Tbk, an integrated energy company listed in Indonesia with businesses in oil and gas exploration and production as well as other energyrelated ventures since 25 November 2015. Dato Che Abdullah @ Rashidi Che Omar is SIMEPLT Independent Non-Executive Director. He was the Managing Director of TH Plantations Berhad since 2003 before he retired in 2009. Ms. Tan Ting Min is SIMEPLT Independent Non-Executive Director. She was the Head of Research in Credit Suisse Malaysia for 7 years from 2010 until her retirement in 2017. 9

Exhibit 13: Major Corporate Milestones Year Key events 2009 SIMEPLT signed a 63-year concession agreement with the Liberian government for 220,000 ha of land to be developed into oil palm and rubber plantations. SIMEPLT acquired NBPOL which owns about 135,000 ha of 2015 landbank in Papua New Guinea (PNG) and the Solomon Islands. Sime Darby Berhad announced the Pure Play Strategy which leads to SIMEPLT 2017 listing as a pure plantation Company. This will enable SIMEPLT to pursue its objectives with greater focus. Source: Company 10

MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL Total return is expected to be >10% over the next 12 months. Stock price is expected to rise by >10% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -10% and +10% over the next 12 months. Total return is expected to be <-10% over the next 12 months. Stock price is expected to fall by >10% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 11