Industry-wide earnings plummeted in 2012, weighed down by a 11.8% drop in CPO prices, weaker-than-expected production and increased fertilizer costs. We believe that earnings will spring back in 2013, driven by: i) lower fertilizer costs, ii) a recovery in production from 2012’s depressed levels, and iii) firmer CPO prices on the back of lower stockpiles. We see SOP outperforming its peers due to itsfavourable tree age profile and strong near- and medium-term production growth, as well as a management that knows how to get the most out of its trees. Maintain BUY, with FV of RM6.77.
Young and vibrant. Despite industry-wide weak production in 2012, SOP’s fresh fruit bunches (FFB) production growth was one of the highest within our Malaysian coverage due to its young trees and good estate management practices. 11M2012 production grew 6.5% y-o-y, improving from 10M2012’s 4.6% y-o-y growth. Monthly production y-o-y accelerated by 24.9% in November 2012, a stark contrast from the contraction seen in 1H2012. We believe SOP’s production will revert to a normal growth trend in 2013, with output increasing by a decent 11.9% in 2013. Some 68.2% of the company’s trees are still at or below 10 years old, which provides ample room for organic production expansion in the medium term.
More benign downstream environment. Being new to the refining business, SOP has been particularly conservative in its business dealings. To avoid initial glitches that may could force it to default on its refined palm oil sale agreements, the company chose to be conservative by lengthening the gap between production and sale (e.g. scheduling to produce refined oil in July but selling the product in August). However, as palm oil prices have plunged sharply since July, this move led to losses, forcing SOP to sell its refined products below cost. Since then, refining margins have widened and downstream profits are likely to improve further next year following the Government’s long-delayed initiative to abolish tax-free CPO exports beginning January 2013.
A more bountiful 2013. In view of weaker-than-expected production and prices, SOP’s FY12 earnings will likely come in 32.4% weaker than that in FY11. Nonetheless, we see a meaningful recovery in 2013. Our estimate is for FY13 earnings to surge 38.2% as CPO price averages RM2,750 per tonne and FFB production rises to 1.05m tonnes.
Maintain BUY. We value SOP at a FV of RM6.77, based on a 13.0x FY13 PE. The company continues to be a BUY as well as our top Malaysian sector pick for its strong growth prospects and solid management. Despite the industry-wide weak earnings in FY12, SOP represents particularly good value within the Malaysian plantation space. It possesses one of the best tree age profiles in terms of near- and medium-term production growth and is trading at valuations below the industry benchmark.
Young and vibrant. Despite industry-wide weak production in 2012, SOP’s fresh fruit bunches (FFB) production growth was one of the highest within our Malaysian coverage due to its young trees and good estate management practices. 11M2012 production grew 6.5% y-o-y, improving from 10M2012’s 4.6% y-o-y growth. Monthly production y-o-y accelerated by 24.9% in November 2012, a stark contrast from the contraction seen in 1H2012. We believe SOP’s production will revert to a normal growth trend in 2013, with output increasing by a decent 11.9% in 2013. Some 68.2% of the company’s trees are still at or below 10 years old, which provides ample room for organic production expansion in the medium term.
More benign downstream environment. Being new to the refining business, SOP has been particularly conservative in its business dealings. To avoid initial glitches that may could force it to default on its refined palm oil sale agreements, the company chose to be conservative by lengthening the gap between production and sale (e.g. scheduling to produce refined oil in July but selling the product in August). However, as palm oil prices have plunged sharply since July, this move led to losses, forcing SOP to sell its refined products below cost. Since then, refining margins have widened and downstream profits are likely to improve further next year following the Government’s long-delayed initiative to abolish tax-free CPO exports beginning January 2013.
A more bountiful 2013. In view of weaker-than-expected production and prices, SOP’s FY12 earnings will likely come in 32.4% weaker than that in FY11. Nonetheless, we see a meaningful recovery in 2013. Our estimate is for FY13 earnings to surge 38.2% as CPO price averages RM2,750 per tonne and FFB production rises to 1.05m tonnes.
Maintain BUY. We value SOP at a FV of RM6.77, based on a 13.0x FY13 PE. The company continues to be a BUY as well as our top Malaysian sector pick for its strong growth prospects and solid management. Despite the industry-wide weak earnings in FY12, SOP represents particularly good value within the Malaysian plantation space. It possesses one of the best tree age profiles in terms of near- and medium-term production growth and is trading at valuations below the industry benchmark.
Source: OSK
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