SOP (FV RM7.09 - BUY) FY11 Results Review: Slowest Quarter of the Year

SOP posted FY11 earnings of RM243.0m (+61.4% y-o-y) on the back of stronger FFB production (+22%) and higher realized CPO prices (+21%). While 4Q production predictably fell q-o-q due to the yearly seasonal production downcycle, significant cost increases saw 4Q earnings disappoint, a first  after four consecutive quarters of expectation-beating results. We are nonetheless raising our FY12 forecast to RM255.9m. Maintain BUY at FV RM7.09.

Falls short. SOP registered 4QFY11 revenue of RM313.6m (+47.5% y-o-y due to stronger production and despite weaker palm prices,  -3.8% q-o-q on the back of both lower production and prices). 4Q earnings, meanwhile, dropped to RM43.3m (-10.8% yo-y,  -42.8% q-o-q), the worst quarter for the year. 4Q EBITDA margins contracted 13.2 ppt y-o-y and 11.1 ppt q-o-q amid softer prices and higher cost. A higher effective tax rate of 27.3% (+6.5 ppt q-o-q) also contributed to the q-o-q earnings decline.  Full year earnings, nonetheless, recorded a 61.4% y-o-y growth to come in at RM243.0m but fell short of  our forecasts, representing 92.3%  of our estimates  but was within consensus (95.7%). Topline was above expectations but significant cost increases dampened earnings.

FFB production grows >20%. SOP produced 216k tonnes of FFB in 4Q (+22.4% y-o-y on maturing trees,  -9.3% q-o-q due to the production seasonal downcycle). Full year production was 820,997 tonnes (+21.9% y-o-y), 1.1% better than our 811,741 tonnes forecast (a forecast we kept since the beginning of 2011). CPO production, at the meantime, increased by 30.4% compared to 2010.Our expectations are for FFB production to grow by 16.1% in FY12 before rising by 13.2% in FY13 to break the 1-million-tonne mark.

Forecast revision. Despite the poorer than expected 4QFY11 numbers, we are revising our FY12 earnings forecast upwards by 8.9% to RM255.9m (+5.3% y-o-y) based on i) a narrower CPO price discount to MPOB average (from  -2% to  -1%) due to its refinery coming on stream, which we think will provide SOP with better pricing power, and ii) higher palm kernel price assumption (RM1,660 per tonne). We are introducing our FY13 earnings forecast at RM304.8m (+19.1% y-o-y), premised on a higher average CPO price assumption of RM3,100 per tonne, 13% FFB production growth and initial earnings contribution from its refinery. Following our forecast revision, we revise our FV to RM7.09 based on 12.0x FY12 PER. Maintain BUY.

Source: OSK188