Sarawak Plantation - NOT RATED - 20Mar12

We came back with an optimistic view on Sarawak Plantation (SWKPLNT) after a meeting with its management. We reckon that the company is now a potential turnaround story that could be worth following. The main catalyst will be the significant jump in the group’s FFB yield in the next two years from its current low base of 13.0mt/ha to 19.8mt/ha in FY13E. The company’s valuation is also extremely attractive as it currently trades at only 9.0x FY12E PER, a PEG of 0.65x, and a EV/planted hectare of c.RM26,000 (all of these are lower than all planters under our coverage). The additional sweetener will be its superior FY12E-FY13E dividend yield of 5.5%-6.9%. We estimate FY12-13E net profit to be at RM94m-RM116m, representing a strong 14%-24% YoY growth. We value SWKPLNT at RM3.70, pegging its 3-year average Fwd. PER of 11.0x to our FY12E EPS of 33.45 sen.

Expects a strong turnaround. SWKPLNT elected a new Managing Director in Mar-2011 and a new Chief Operating Officer in Oct-2011. These changes in management saw an impressive earnings growth of 139% YoY to RM82m in FY2011. The good result was mainly attributed to a successful enhancement of the company’s Fresh Fruit Bunch (FFB) yield by 15% to 13.0 mt/ha and the Oil Extraction Rate (OER) by 42pp to 21.03%. We believe the company’s turnaround is still at its very early stage, judging from the group’s low base FFB yield at 13.0 mt/ha. In 2013E, the FFB yield should improve to the industry level of c.20.0mt/ha, leading to a 40% surge in the FFB production to 440,488 mt (from 314,758 mt in FY11).

Deeply undervalued. Trading at only 9.0x FY12E PER, a PEG of 0.65x, and a EV/planted hectare of c.RM26,000, the market has clearly under-appreciated this stock. SWKPLNT’s FY12E PER of 9.0x is at least 32% lower than other mid-cap pure planters which trades between 13.3x-15.6x their FY12E PER. Its EV/planted ha. of c.RM26,000 is also significantly lower than Sarawak Oil Palm’s c.RM46,000 and the other planters’ range of RM70,000-RM73,000.

Aggressive expansion in FY12E. We expect the company to expand its planted area by 9,200 ha (+32% YoY) to 38,504 ha in FY12E. Hence, its immature/planted area ratio will increase from 12% to 36% by end-FY12E, on par with the bigger-cap planters such as GENP and IJMP.

Highest dividend yield among planters. We expect generous FY12E-FY13E net dividends of 16.7-20.7 sen, representing net dividend yields of 5.5%-6.9%. This is higher than other planters’ net dividend yields, which ranges from 1.3% to 4.4%. We have assumed a payout ratio of 50%, slightly lower than the group’s 5-year historical payout range of 55%-60% due to its need to conserve some cash to develop its land bank.

Good earnings prospect. We expect FY12E-FY13E earnings of RM94m-RM116m, representing a strong growth of 14%-24%. FY12E key earnings driver will be the 23% surge YoY in the FFB roduction to 386,865 mt as the FFB yield improved to 16.8mt/ha (from 13.0mt/ha). Note  that we have assumed average CPO prices of RM3,100 per mt  for both FY12E and FY13E, hence its earnings could surprise on the upside should CPO prices turn out to be better than expected.

Source: Kenanga