SD Guthrie Midstream and Downstream Strength, Diversified Growth

Upstream strength negates the downstream weakness

MALAYSIA | PLANTATION | UPDATE

• SDG’s upstream business remains the key earnings driver as downstream segment to remain under pressure.
• Maintain our 2025-27E forecasts, with earnings to be underpinned by stronger 2H25 upstream performance, supported by seasonal peaks, sustained yield momentum in PNG, steady contributions from Indonesia and stable CPO price
• We downgrade the stock to HOLD with unchanged 12-month TP of RM5.21

Source: Bloomberg, Phillip Research Forecasts

Solid 6M25 performance; multi-pronged growth catalysts ahead

2H25 outlook supported by production recovery. Management anticipates 2H25 group production to surpass 1H25, supported by seasonal peaks in Malaysia, sustained yield momentum in PNG, and stable output from Indonesia. Fertiliser application is well ahead of schedule at 60% in Malaysia, 77% in Indonesia, and 84% in PNG, which bodes well for cost should preserve fertiliser savings into 2H25, despite some catch-up application. Looking ahead, we project SDG’s FFB output to grow at a 3-year CAGR of 3.8% (2024-27E), supported by improving labour productivity in Malaysia, rising mechanisation and digitalisation across estates, and favourable maturing age profiles. We forecast FFB production of 9.2m/9.8m/9.8m tonnes in 2025-27E, with yields rising from 19.25 mt/ha in 2025E to 20.32 mt/ha in 2027E. With estate demographics normalising, labour efficiency improving, and mechanisation momentum accelerating, SDG is well-positioned for sustained production growth and will benefit from more substantial operating leverage over the medium term.

Source: Company, Phillip Research

Estate profile and mechanisation momentum. The group’s estate age profile continues to improve, averaging 11.2 years vs. its 11-year target. In Malaysia, 32% of planted areas are now in the prime 9-18 year range, supporting stable yields; Indonesia still carries legacy issues from the SARA acquisition, with 19% of planted areas above >22 years. Replanting remains focused on old palms to facilitate mechanisation, with an average rate of c.6% of planted areas. Progress on mechanisation is evident, with the land-to-man ratio improving to 1:5 ha/worker (from 10.4 ha pre-COVID), on track towards the 1:8 ha/worker medium-term target. Mechanisation is now applied across most non-harvesting activities, lifting efficiency, and reducing reliance on manual labour. While harvester supply remains tight, with only 10k of 20k foreign workers deployed, productivity gains are expected to continue as mechanisation deepens. With a younger estate profile, progressive replanting, and rising mechanisation, we believe SDG is positioned for sustained yield improvement and will benefit from further unit cost improvements. As harvesting constraints gradually ease, we see upside to FFB output growth, with disciplined replanting and mechanisation to underpin margins and long-term productivity gains.

Cost and yield trends underpin upstream margin. 2Q25 blended unit cost fell to RM2,445/MT, with management maintaining 2Q25 guidance below RM2,500/MT. Lower fertiliser costs and better productivity are expected to sustain margins into 2H25, offsetting the impact of EPF contribution hike (estimated additional RM9m annually) and wage adjustments (additional RM48m annually). OER recovery is progressing, albeit constrained by younger palms and seed quality, while productions continue to benefit from seasonally stronger output in 3Q25.

Despite easing from prior peaks, ammonia and DAP prices remain volatile. Fertiliser prices have moderated from 2022 peaks as supply-demand dynamics normalized, though volatility persists, particularly in ammonia and DAP. Based on the latest data, fertiliser prices have shown mixed trends YTD, with potash rising from US$320 to US$380/tonne, DAP surged from US$450 to US$580/tonne on resilient demand and tighter Chinese exports, while ammonia contracted from US$570/tonne to US$395/tonne, before rebounding to US$443/tonne in 2S Jul25. In the near term, DAP is expected to remain elevated above US$750-800/tonne, potash to stay range bound at US$380/400/tonne, and ammonia to trade within US$400-480/tonne. Looking into 2026, we foresee prices to remain higher, with DAP maintaining an upward bias, ammonia as the key swing factor, and potash to remain relatively stable. This suggests fertiliser costs for planters will stay elevated above historical norms.

Source: Bloomberg, Phillip Research

Downstream expected to continue to be under margin pressure. Downstream operations continue to face margin compression in Europe, weighed by narrowing RSPO/EUDR premium spreads and softer food manufacturing demand. Nonetheless, sequential improvements are emerging in Asia, with sales volume up by 10% QoQ and utilisation steady at 53% in 6M25. A new refinery in Kuala Berang, slated for commissioning in 2Q26, is expected to serve both local MNC demand and export markets, strengthening downstream integration and earnings diversification. While SDG remains focused on scaling higher-margin differentiated products, management guides for 2Q25 margin to remain flat/up in 1H25. This is broadly in line with our assumptions for the downstream margin to contract to 2.9% in 2025E from 3.3% in 2024.

Strategic monetisation as a medium-term catalyst. Land monetisation remains a key earnings catalyst, with management reiterating its 2Q25 guidance for RM500-700m disposal gains. The EcoWorld JV, expected to be recognised in 3Q25, is expected to deliver a 70% upfront gain (30% deferred as JV profits). Beyond EcoWorld, 6 additional MOUs have been signed, with the Baimuri-Tabung Haji JV next in line. Management highlighted that if its industrial development pipeline is fully executed, land monetisation could unlock RM500m-1bn in annual earnings within 5 years, cementing a significant non-plantation earnings stream. Key milestones include:

• Jun25: Disposal of 300 acres for RM89m cash to Menteri Besar Incorporated of Negeri Sembilan (MBNS), alongside an MoU to jointly develop another 300 acres. Combined, the 600 acres form part of the 1,420-acre Port Dickson Free Zone.
• Jun25: MoU to JV with Sime Darby Property to develop a 2,000-acre industrial and logistics hub on Carey Island.
• Apr25: Disposal of 1,195 acres in Bukit Pelandok for RM573m cash to a JV comprising Eco World (55%), NS Corporation (15%), and SDG (30%), targeted to complete in 3Q25.
• Nov24: MoU with AME Elite Consortium to develop a 641-acre green integrated industrial park in Ladang Kulai, Johor.
• Aug24: MoU with TH Property to expand its “techpark@enstek” halal manufacturing hub involving 464 acres.
• Ongoing: Due diligence for Kerian Integrated Green Industrial Park (KIGIP) with parent PNB, involving a 660-acre solar farm and a 340-acre industrial park.

These developments reinforce land monetisation as a structural earnings driver. With multiple partnerships in place and strong state-level support, we see continued execution of the pipeline as a key re-rating catalyst for SDG.

Source: Company

Renewable energy (RE) and new earnings streams. SDG is leveraging its extensive landbank to diversify into RE, creating new long-term earnings visibility beyond CPO. Its 15MW solar plant in Kedah under the Corporate Green Power Programme (CGPP), with RM40-50m capex and an estimated IRR of c.10%, is slated for commissioning by end25. While the earnings contribution in 2025 will be minimal, contributions should be more meaningful from 2028E onwards, with management highlighting that returns per hectare from RE could surpass palm oil on selected sites. SDG has also submitted bids for c.100MW of solar capacity under LSS5+. While LSS projects typically deliver lower single-digit IRR compared to industrial park developments, they remain part of SDG’s portfolio approach. Notably, the group has yet to secure any LSS5 project. Still, it is expected to continue bidding for future rounds as well as exploring direct supply under the Corporate Renewable Energy Supply Scheme (CRESS). SDG has clarified that no additional land will be leased for solar, with existing leases already covering 24 sites (583MW). The progressive rollout of CGPP, CRESS, and BESS projects positions SDG to unlock value from its landbank while reducing earnings cyclicality tied to CPO prices.

ESG leadership strengthens market access. SDG continues to lead in sustainability compliance, with all mills EUDR-certified and fully traceable. The group plans to release its first TNFD-aligned sustainability report in 2026 and is piloting regenerative agriculture framework to improve biodiversity and long-term soil health. These efforts position SDG to secure a premium in compliant markets, while mitigating potential trade barriers in Europe. SDG has delivered its first EUDR-compliant shipment of 40,250 tonnes to the EU and UK in Sept24, securing continued market access and tapping into growing demand from ESG focused buyers. In Apr25, the group also executed its inaugural EUDR-free shipment of 8,000 MT of RSPO certified CSPO from Sabah to Liverpool under the CPTPP framework. In addition, the acquisition of a 48% stake in Netherlands-based Marvesa Supply Chain Services B.V. strengthens its downstream integration and its supply capabilities in oils and fats for the European animal feed and biofuel industries. Taken together, these initiatives not only mitigate regulatory risks but also create an earnings premium opportunity by differentiating SDG as one of the most advanced Malaysian plantation players in ESG compliance and sustainable market access.

2H25 outlook supported by production recovery and price stability

Keeping our earnings forecast unchanged. To recap, SDG delivered a robust set of 6M25 results, with core PATAMI surging 57% YoY to RM1.03bn, surpassing the RM1bn milestone for the first time in a half-year period. The performance was underpinned by upstream strength, particularly from Malaysia and PNG, where stronger FFB production, higher OER, and steady CPO prices offset the impact of wage and levy increases. EBIT rose 6% YoY to RM1.62bn, with unit cost improvements aided by higher FFB and CPO production, fertiliser savings, and greater mechanisation.

Upstream strength underpins momentum. The upstream segment will remain SDG’s key earnings driver. 6M25 FFB output grew 3% YoY to 4.29m MT (47% of our full-year forecast of 9.15 MT), supported by favourable weather and improved labour efficiency—on track to meet 2025 targets. OER improved 0.3 ppts YoY to 21.46%, while realised CPO prices averaged RM4,339/MT (+9.5% YoY). Unit cost declined sharply, with 2Q25 blended cost to customer at RM2,445/MT (1Q25: RM2,591/MT), tracking towards 2Q25 guidance of

Earnings outlook intact with 2H25 upside potential. S57 impact remains negligible for upstream, while downstream PKO/PKS exemptions are still pending. Strategic export routing (PNG to Europe, Sabah to the UK) continues to cushion SDG from tariff risks. We leave our 2025-27 forecasts unchanged. 6M25 results are in line with our assumptions, and we expect stronger earnings in 2H25 on the back of higher FFB and CPO output, and firmer ASP. While potential land disposal gains could provide upside to 2H earnings, we have yet to factor these into our forecasts, pending greater visibility. We expect SDG’s CPO price to average RM4,340/MT in 2025E, before easing to RM3,910/RM3,840/MT in 2026-27E, with downstream operating margins projected to compress to 2.6%-3.0% from 3.3% in 2024.

Near-term CPO sentiment firm. YTD Jul25, CPO averaged RM4,310/MT, with Aug25 trading in the RM4,200-4,400/MT range. Near-term sentiment is buoyed by stronger restocking demand in India and China, firmer soybean oil prices in the US and Brazil amid higher biofuel blending, and active PO trading in Dalian. In Indonesia, 2 developments could provide support to CPO prices, including 1) the government’s plan for producers to raise domestic cooking oil sales to 175,000 MT/month under the DMO scheme – tightening global supply, and 2) the proposed B50 biodiesel mandate from 2026, which could require an additional 3M MT of palm oil annually. Given SDG’s high upstream exposure, earnings sensitivity to CPO price remains material with every RM100/MT change in CPO price translating into c.±5% impact to earnings.

Source: MPOB, Phillip Research

Source: Company, Phillip Research

Healthy cash flow supports dividends and reinvestment. SDG maintains a healthy balance sheet with RM537m in cash against RM5.6bn borrowings, translating into a net gearing of 25% as at Jun25. Its dividend-paying ability is underpinned by robust cash flow and potential land/RE monetisation proceeds of RM500-700m in 2025. These should comfortably absorb the step-up in labour costs (RM48m annually), incremental EPF contributions for foreign workers (RM9m annually), and S57 related costs (RM1mn-2mn annually). While clarification is pending on PKO/PKS exemptions under the new S57, the overall tax impact on upstream is expected to be immaterial. We expect SDG to sustain DPS of 15sen in 2025E, translating into a c.3% dividend yield.

Source: Company, Phillip Research Forecasts

Valuation and recommendation

Maintain Target Price of RM5.21 with HOLD call (BUY previously). We maintain our 2025–27E forecasts, with earnings underpinned by stronger upstream performance in 2H25, driven by higher production in Malaysia, steady output from PNG estates, and CPO prices. Earnings visibility is further supported by JV and land monetisation initiatives, alongside continued diversification into sustainability-related ventures. That said, downstream operations in Europe are expected to remain under pressure, though Asian operations have shown signs of stabilization. We reiterate our 12-month TP of RM5.21, pegged to 22x P/E on 2026E EPS, in line with large-cap plantation peers. However, we downgrade the stock to HOLD (from BUY) as the recent share price performance has largely priced in near-term upside.

Source: Bloomberg, Phillip Research Forecasts

Key risks to our call include a sharper-than-expected decline/increase in palm oil prices and production, adverse weather affecting yields, unfavourable regulatory/tariff changes in key export/import markets, prolonged downstream margin compression, and delays or lower-than-expected proceeds from land monetisation and JV execution.

FINANCIALS

Source: Company, Phillip Research forecasts

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