Sime Darby Oils rebalancing portfolios to mitigate commodity price volatility and Covid-19

Published on June 17, 2020 on The Edge Markets

Written by: Arjuna Chandran Shankar

KUALA LUMPUR (June 16): Sime Darby Plantation Bhd (SDP)’s downstream business Sime Darby Oils Sdn Bhd (SDO) is aiming to rebalance its business portfolios to weather volatile commodity prices and Covid-19.

In an interview with theedgemarkets.com, SDO’s managing director (MD) Mohd Haris Mohd Arshad explained that its commodity product segment — which exports its oils abroad — has been hit the hardest on a year-to-date basis.

“This [commodity products] will continue to come under pressure. Changes in government import duties would impact whether we are selling crude or refined palm oil. Obviously, for Sime Darby Oils we want to be selling refined palm oil. It is going to be a challenge for us. That does not mean that this will be bad, but it will derail us from our profit target in 2020,” he said.

In Malaysia’s largest palm oil market India, import duties on crude palm oil were raised to 44%, from 37.5% previously, while import duties on refined palm oil remain unchanged at 45%.

Haris noted that its consumer products segment had been supporting the company, noting that it performed “fairly well” in Europe and is expecting the segment to continue to do well for the rest of the year.

Its commodity product segment currently forms 60% of its business, while the remaining 40% comprises its food products — which includes consumer products and food service products — as well as nutritional product and biodiesel segments.

SDO’s overall financial performance in 2020 is likely to be weaker than before. Haris opined that a recovery would very much depend on the resolution of the pandemic and global economic crisis.

“Having said that, Sime Darby Oils has been profitable primarily because of our composition, where we have been shifting for the past five years. It is time to shift away from a commodity product business, and we have been building our food product business that has served us quite well to mitigate these price volatilities,” he said.

Veering away from commodity products

Meanwhile, within its food, biodiesel and nutritional products segment, Haris said SDO is changing its mix of product offerings to address the shift in consumer consumption habits.

For example, the company has launched smaller-sized products meant for household use that were previously sold under its food service product division — which targets restaurants and large-scale food operators — such as its Crispa Gold sunflower oil brand in South Africa.

Meanwhile, SDO is also looking at growing its biodiesel and nutritional product segments. For example, this includes making investments in deepening its capacity with existing production facilities, such as its recent move to increase its biodiesel capacity to 120,000 tonnes a year.

Haris said SDO’s operating margin averages 4.5%, with its food product business having an operating margin of 7% to 8%, compared to its commodity business’ 2% margin.

“And then we have a smaller business which is biodiesel and nutrition. In nutrition, the [operating] margin is 30%. That is a very small [part of our business]. Hence when we [talk] about pivoting, we are looking to expand further into biodiesel and nutrition [as well]. When you look at consumer products, that 7% to 8% is stable, but it is the commodity segment which can be a bit of an issue for us,” he said.

While SDO is turning towards the consumer product space, Haris stressed that it will not compete with its customers in the fast-moving consumer goods space.

“Now, whether we become their partner of choice or collaborate with them on a product, those are the kind of things we will focus on. So we are not going to be competing with Nestle, or Unilever. That is not our space. Our expertise is in oils and fats science,” he said, adding that SDO is currently in the midst of negotiations with potential joint venture partners as well.

Asset disposals

In terms of asset disposals, Haris said there are a couple of assets that SDO may divest itself of, with the proceeds to be deployed towards other parts of its business, such as installing a new line at its Port Klang refinery, or doubling its biodiesel capacity.

SDO’s refinery capacity utilisation is currently at 70%, with its 2020 target at 77%. In order to increase its capacity utilisation, Haris said the group has booked RM65 million in expansionary capital expenditure, which has been committed towards increasing its biodiesel capacity and increasing the utilisation rates of its refineries.

As it stands, SDO has doubled its biodiesel tonnes to 120,000 tonnes a year.

The SDO MD added that when its capacity was 60,000 tonnes a year, it was running at more than 100% capacity, due to its orderbook among major petroleum companies in Malaysia as well as its export commitment.

“If we look at our capacity with 120,000 tonnes, it is very clear that it will be full by the end of 2021 if things go back to normal,” he said while explaining that the upgrade in volume was on the back of including multiple feedstocks such as technical grade oil and used cooking oil.

Haris said that once SDO has “put its house in order” or executed measures as part of its transformation plan, and becomes “best in class”, it will be able to deliver greater earnings.

According to SDP’s first quarter ended March 31, 2020 (1QFY20) results, SDO was one of the driving factors for the quadrupling of its quarterly net profit of RM394 million from RM90 million last year.

Downstream operations saw a profit before interest and tax of RM89 million, up 5% y-o-y from the RM85 million posted in the corresponding quarter last year following higher profits at its European refineries and better sales margin and fair value gains in commodity hedges.

That said, weaker performance from the Asia-Pacific region was registered due to a fair value loss on derivatives incurred by its refinery in Malaysia and lower demand particularly from China and India.

Reference:

https://www.theedgemarkets.com/article/sime-darby-oils-rebalancing-portfolios-mitigate-commodity-price-volatility-and-covid19

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