SDG: Earnings Outperform on Operational Efficiency and Strategic Initiatives

The company delivered a robust financial performance in the third quarter of fiscal year 2025 (3QFY25), with results slightly exceeding market expectations. Core net profit saw a significant year-on-year (YoY) increase of 34.0%, reaching RM485 million, while revenue grew 2.7% YoY to RM5.4 billion. This strong momentum extended to the cumulative nine-month period (9MFY25), where core net profit surged 49.2% YoY to RM1.5 billion, underpinned by a 5.6% YoY growth in revenue.

Performance Drivers

The impressive performance was primarily driven by improved margins and substantial contributions from joint ventures, notably a RM435 million PBIT from the sale of industrial land. The upstream division was a key contributor, with PBIT increasing 20.4% YoY. This was largely due to higher Fresh Fruit Bunch (FFB) output and strengthened palm product prices, as the average Crude Palm Oil (CPO) price rose 8.5% YoY to RM4,292/tonne and Palm Kernel (PK) prices surged 47.0% YoY to RM3,226/tonne. Production growth in Indonesia (+4.4%) and Papua New Guinea (+7.5%) provided a solid base, largely offsetting a minor 1.0% decline in Malaysian output attributed to unfavorable weather conditions.

Navigating Challenges and Future Outlook

Despite the strong overall performance, the downstream division faced headwinds, reporting a 25.2% YoY decline in PBIT for 9MFY25. This was primarily due to margin compression and softer demand across most regions, with the differentiated business in Europe particularly affected by muted demand and intensified market competition. Management anticipates a single-digit decline in FFB production in 4QFY25 due to early crop tapering and wet weather in Malaysia, though strong contributions from Indonesia and PNG are expected to mitigate part of the decline. Overall, FY25 FFB production is projected to see low single-digit growth.

Looking ahead to FY2026, FFB output is forecast to expand at a higher single-digit rate, supported by maturing replants, improved crop recovery in Malaysia, full labour complement, and enhanced field mechanisation. The group’s strategic land monetisation program remains on track, targeting RM500-700 million in net annual gains over the next five years through joint ventures encompassing approximately 10,000 acres. Fertiliser costs are expected to decrease by 2-3% YoY in FY25 before modestly rising by 1-3% in FY26 due to higher global input prices. Downstream margins in Europe are expected to remain under pressure in the near term but anticipate a gradual recovery, driven by renewed demand linked to EUDR implementation, ongoing cost optimisation efforts, and expansion into non-food downstream segments.

Addressing an Indonesia land issue affecting approximately 4,200 hectares, management expressed confidence in its ownership, with minimal financial impact anticipated and no provisions made.

Investment Recommendation

Following an upward revision of earnings projections for FY25-FY27 by 3.1-8.6%, factoring in higher margins and stronger contributions from joint ventures, TA SECURITIES has issued a BUY recommendation for the company. The investment bank has set a Target Price (TP) of RM0.25, indicating a 25.0% upside from the last traded price of RM0.20.