THE BUZZ
Sarawak Oil Palms (SOP) has entered into a JV agreement with
Shin Yang Shipping (SYS) to purchase two edible oil tankers from Swee Joo at a
combined cost of RM45m. SOP will hold a 45% stake in the JV company while SYS
will hold the remaining 55%.
OUR TAKE
Former Swee Joo
ships. The tankers bought are the two largest tankers Swee Joo has on its
stable at a capacity of 10k and 12k tonnes respectively. SOP will inject cash
of RM7.7m for its 45% stake in the JV entity as well as contribute an
additional RM2.3m for working capital purposes, which is insignificant in view
of the company’s RM508.4m cash pile. The RM45m price tag on the tankers will be
funded through bank borrowings, of which the JV entity will gradually repay
through funds generated from the ships’ operations. We find SOP’s participation
in the JV not entirely uncommon, as Wilmar also owns its own ships.
First right to use.
We understand that SYS, the party with the shipping expertise, will be the one
running the JV company. What SOP will get from the arrangement is the first
right to use the tankers, with the understanding that the tankers will not be
for the sole use of SOP. We also understand that SOP will not be obliged to
ship their oil exclusively through the JV company and that shipping rates
charged will be based on prevailing market rates. While both SOP and SYS are
directly related to the Shin Yang Group, the management has repeatedly
emphasized that transactions will be done at arm’s length.
Immaterial but
overall positive. The deal appears to be a one-off and not a diversification
attempt to extend itself into the shipping business. Nonetheless, we think the JV should generally
benefit SOP as its Bintulu refinery comes on stream in 2QFY12. With the first
right to use arrangement, the two oil tankers will provide some guaranteed shipping
capacity for SOP’s RBD palm oil to be transported to major edible oil markets like
China and the Eastern coast of India.
Downgrade to NEUTRAL.
We believe FY13 will be an exciting year on the back of i) higher
average CPO prices (our price assumptions are RM3,100 per tonne), ii) initial earnings
contribution from its refinery, and iii)
13.2% FFB production growth, translating into 19.1% y-o-y earnings
growth. We will thus raise our FV when we begin looking into FY13. As for now
though, we are downgrading SOP to NEUTRAL at an unchanged FV of RM7.09, based
on 12.0x FY12 PER. The stock has done extremely well since our initiation in
February 2011, providing a return of 87.1% and is the best performing plantation
stock within our coverage. While we continue to view the company as one with good
management and strong growth potential, we think the limited upside for now no longer
warrants a BUY call.
Source: OSK188
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