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Nikkei Markets

Sime Darby Plantation's net profit drops 10% on weaker price

Analysts said earnings may have bottomed in June, prices headed higher now

A move by the European Union to limit use of palm oil in biofuel over allegations of deforestation and unsustainable farming practices have threatened demand for the tropical commodity.   © Reuters

KUALA LUMPUR (Nikkei Markets) -- Sime Darby Plantation, the world's largest palm oil producer by acreage, said Friday its net profit fell 10% in the second quarter due to weaker prices and lower downstream earnings.

Net profit for the three months ended Jun. 30 totaled 27 million ringgit ($6.39 million) compared with 30 million ringgit over the same period last year, Sime Darby Plantation said in an exchange filing. Quarterly revenue declined 6.5% year-on-year to 2.88 billion ringgit from 3.08 billion ringgit.

Fresh-fruit production will continue to improve through the rest of 2019 due to seasonal factors, the company said. However, crude palm oil prices are expected to remain relatively flat as stronger biodiesel demand absorbs higher output, it said.

"We have aggressively put in place measures that would help us navigate through the current market conditions," Sime Darby Plantation said. "These include the strategy to balance the profit contribution from both our upstream and downstream segments as a mid-to-long term solution."

Prices of the edible oil used in everything from snacks to cosmetics have been under pressure for months tracking mammoth stockpile. Inventory started to shrink from record high level in December 2018 but demand has yet to pick up pace sharply.

A move by the European Union to limit use of palm oil in biofuel over allegations of deforestation and unsustainable farming practices have threatened demand for the tropical commodity.

Malaysia and Indonesia, the two largest producers accounting for as much as 90% of the global supply, have protested strongly against the move and took steps to boost use of biodiesel in their own country.

Analysts said Sime Darby Plantation's latest earnings missed market expectations, although earnings may have bottomed in June as palm oil prices have started edging higher since then.

"Hopefully we have seen the worst in this quarter," said RHB Research Institute Analyst Hoe Lee Leng. Palm oil prices would probably average 2,122 ringgit a ton in the second half before ending the year at 2,100 ringgit, Hoe said.

Sime Darby Plantation realized an average per ton price of 2,016 ringgit during the first six months of the year. The 16% year-on-year decline dragged its upstream operations in Indonesia, Papua New Guinea, and Liberia into the red.

If prices stay around current levels of 2,200 ringgit per ton until December, those upstream operations will likely return to profit in the second half, Sime Darby Plantation Chief Executive Mohamed Helmy Othman Basha said at a post-earnings briefing.

Demand from India and China will also pick up by then, helping to the company to boost its performance, said Public Investment Bank's Analyst Chong Hoe Leong.

"We are seeing strong demand from India and China," he said. "Margin will recover, sales will rise, while cost will be lower, led by higher production and higher palm kernel."

In the meantime, the company is in the midst of shedding some assets in Malaysia in an exercise that could potentially fetch about one billion ringgit. Sime Darby Plantation is also in talks to sell its operations in Liberia where the company has a 63-year concession to develop 220,000 hectares into palm oil and rubber plantations.

The company will hand back the concession to the Liberian government as a "last resort" if it fails to agree on terms of the sale with potential buyer by this year-end, Helmy added.

Shares of Sime Darby Plantation rose 2.1% to 4.98 ringgit apiece on Friday, while the benchmark FTSE Bursa Malaysia KLCI ended 1.1% higher.

- Jason Ng and Gho Chee Yuan

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