Sarawak Oil Palms - Green Shoots of Recovery

In line with the Malaysian plantation industry’s weak performance, SOP registered lower 1HFY12 earnings of RM91.6m (-27.5% y-o-y) as slightly softer production and a steep drop in realised palm prices suppressed profits. However, production has recovered significantly in July, the first within our Malaysian plantation coverage to post such impressive production gains. We keep our forecasts unchanged on expectations of a substantially improved 2H and maintain our FV at RM9.37. Maintain BUY, with SOP as our top Malaysian plantation pick.

Predictably weak. SOP posted 2QFY12 revenue of RM281.6m (-2.3% y-o-y, +23.1% q-o-q) and earnings of RM51.9m (-26.0% y-o-y, +30.6% q-o-q) as a seasonal uptick in production lifted profits sequentially. A drop in both FFB output and realised CPO prices, however, led to an earnings contraction on a y-o-y basis. The bottomline for the first half of the year clocked in at RM91.6m (-27.5% y-o-y) as slightly softer production and substantially weaker prices suppressed profitability. Increased production costs arising from higher wages and fertiliser prices also weighed on profits. The half’s earnings represent 41.1% and 41.0% of our and consensus forecasts respectively.

Soft 2Q production. SOP’s FFB production struggled in 2Q2012, in line with the Malaysian plantation industry’s weak output. The quarter’s production was lower by 9.8% y-o-y, bringing 1H2012 production to 355,876 tonnes (-2.5% y-o-y). The weak figures came despite the near-perfect weather, with abundant sunshine and evening showers, in SOP’s planting region since October 2011 as the tail-end of the 1Q2010 drought suppressed crop yield. 2Q production did grow by 18.2% q-o-q, however, as output has entered its seasonal upcycle. SOP’s 1HFY12 production accounts for 39.3% of our full year production forecast.

Shoots of recovery. Despite 2Q’s poor output, SOP’s FFB production has made a strong recovery in July after four consecutive months of y-o-y decline. July production rose by 12.8% y-o-y, making SOP the first among our Malaysian plantation coverage to post double-digit y-o-y monthly production gains (see Figure 1). This has finally pulled SOP’s YTD production back to marginally positive territory. Our full year expectations are for production to grow by 10.3% in 2012, implying that 2HFY12 production will increase by 20.5% y-o-y. 1HFY11 production accounted for 44.5% of FY11’s full year output following an especially strong 2QFY11. We expect production to be more skewed towards 2H this time around.

Maintain BUY. In line with our view of a substantially stronger 2H, we are keeping our estimates unchanged following our earnings and production forecast revision on 3 Aug. Our FV is thus unchanged at RM9.37, based on 13.0x FY13 PE. SOP remains our top Malaysian plantation pick given its young tree age profile, attractive valuations and strong management expertise. Despite the weak 2Q, the company is still trading at an undemanding 13.4x FY12 PE.

 

Source: OSK