4Q Hitch Unlikely to
Resurfac
After SOP’s share price retreated by as much as 4.3%
following its poorer than expected 4QFY11 performance, we took a closer look at
its results and sought management’s clarification. In 4QFY11, the company was
hit by a lumpy refining capacity backlog in Sarawak which led to delays in CPO
shipments and revenue recognition. This should, however, work to SOP’s
advantage once its refinery comes on stream in 2Q. In 4Q, it also paid out
higher performance-based employee compensation after a record year. As these
issues should clear in 1QFY12, SOP remains our Top Malaysian Plantation Buy
call.
Delving into the
numbers. SOP’s 4QFY11 earnings were
below expectations. Although 4Q revenue fell by a lower than expected 3.8%
q-o-q and was 47.5% higher yo-y, the company’s costs of sales jumped 12.8%
q-o-q and 82.4% y-o-y, dragging down its earnings to RM43.3m (-42.8% q-o-q,
-10.8% y-o-y). As both the higher than expected revenue and costs were a
surprise and admittedly puzzling (CPO production -9.3% q-oq, realized CPO price -7.0%, but
revenue was just 3.8% lower), we took a closer look at the numbers and sought
clarification from management.
Higher revenue and
cost as SOP seeks suppliers. In anticipation of SOP’s maiden refinery
coming on stream in 2QFY12, the company has been buying CPO from vendors to blend with its own CPO for shipment (which
naturally raises revenue as well as costs). The company’s
rationale was this would allow it to secure CPO suppliers for its refinery
before it commences operation, on the understanding that a supplier who sells its
CPO to another refinery is unlikely to return to SOP when the company’s
refinery starts running. CPO trading could actually intensify in 1QFY12 as SOP
builds up its CPO supplier base. We find comfort in learning that this move did
not give rise to trading losses (SOP in
fact made a negligible RM0.1m profit
from it). That said, the 1QFY12 earnings should not reflect much
impact on an absolute basis although margins would naturally narrow as SOP
progresses down the value chain. Some 30% of the company’s refining capacity
will be utilized by third party CPOs.
Refining capacity
backlog. SOP sold but was unable to ship 13,000 tonnes of CPO in December
2011 due a backlog in refining capacity in Sarawak. Assuming the same 4QFY11
realized CPO price of RM2,943 per tonne and a 20% net profit margin, successful
shipment would have added RM7.7m to its earnings. Such issues should be resolved once SOP’s
refinery in Bintulu begins operation. While Peninsular Malaysian refiners
rely partly on Indonesian CPO, refineries in Sarawak have ample local production
to cater to their capacity. Contrary to its peers on the other side of the
South China Sea, capacity underutilization
at SOP’s refinery is thus
unlikely to be an issue even if Indonesia’s more favourable export tax
structure is taken into consideration.
Source: OSK188
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