19 fund managers and analysts met Sarawak Oil Palms (SOP)’s management at the recent RHB OSK-DMG Asean HK Corporate Day in Singapore. Refining conditions in Sarawak turned positive in 4Q2012 on strong CPO output and favourable refining margins. We see more downstream investment in the coming years as refining capacity remains insufficient. We are forecasting for earnings to rebound by 36% this year following the industry-wide poor showing in 2012. Maintain BUY, with a FV of RM6.77.
2013 FFB production to grow >13%. SOP’s FFB production rose 5.2% y-o-y to 883k tonnes in 2012. Expectations are for output to breach the 1.0m-tonne mark this year (implying at least 13.2% growth) as production normalises following a weak 2012. We believe this year’s earnings will expand by 36% y-o-y on the back of: i) stronger production, ii) more favourable refining margins, and iii) cheaper fertilizer costs, despite potentially softer average CPO prices on a y-o-y basis.
Downstream environment brightens. The company’s refinery was fully utilized in Nov and Dec last year as Sarawak’s CPO production rebounded. Refining margins also widened as refiners shifted to a spot pricing for its CPO supply rather than the fixed price formula previously agreed upon with millers. Amid a seasonally strong CPO output and an environment of tight refining capacity, refining margins in Sarawak improved substantially in 4Q2012.
More downstream investment on the cards. SOP may look into expanding downstream again over the next two to three years as its own CPO production may soon outpace the company’s refining capacity. Sarawak state is currently facing a mismatch between CPO production and refining capacity, whereby the existing refining capacity of 2.4m tonnes per year is unable to fully cater to the state’s annual CPO output of >2.9m tonnes.
One of our best sector buy ideas. We favour SOP’s strong growth prospects, solid management and attractive valuations (11.2x FY13 PE vs industry’s 15.0x). Should we benchmark SOP to the plantation industry’s average FY13 PE of 15.0x, its current share price implies an average CPO price of RM2,100 per tonne. Maintain BUY, with RM6.77 FV, based on 13.0x FY13 PE.
2013 FFB production to grow >13%. SOP’s FFB production rose 5.2% y-o-y to 883k tonnes in 2012. Expectations are for output to breach the 1.0m-tonne mark this year (implying at least 13.2% growth) as production normalises following a weak 2012. We believe this year’s earnings will expand by 36% y-o-y on the back of: i) stronger production, ii) more favourable refining margins, and iii) cheaper fertilizer costs, despite potentially softer average CPO prices on a y-o-y basis.
Downstream environment brightens. The company’s refinery was fully utilized in Nov and Dec last year as Sarawak’s CPO production rebounded. Refining margins also widened as refiners shifted to a spot pricing for its CPO supply rather than the fixed price formula previously agreed upon with millers. Amid a seasonally strong CPO output and an environment of tight refining capacity, refining margins in Sarawak improved substantially in 4Q2012.
More downstream investment on the cards. SOP may look into expanding downstream again over the next two to three years as its own CPO production may soon outpace the company’s refining capacity. Sarawak state is currently facing a mismatch between CPO production and refining capacity, whereby the existing refining capacity of 2.4m tonnes per year is unable to fully cater to the state’s annual CPO output of >2.9m tonnes.
One of our best sector buy ideas. We favour SOP’s strong growth prospects, solid management and attractive valuations (11.2x FY13 PE vs industry’s 15.0x). Should we benchmark SOP to the plantation industry’s average FY13 PE of 15.0x, its current share price implies an average CPO price of RM2,100 per tonne. Maintain BUY, with RM6.77 FV, based on 13.0x FY13 PE.
A MORE PROSPEROUS 2013
Refining is back in the black. Its maiden venture downstream, a 1,500 tonnes-per-day palm oil refinery situated in Bintulu, had 100% utilization in Nov-Dec 2012 following strong CPO production recovery in the state together with favourable refining margins. As a result of the sharp and rapid plunge in palm oil prices in 2H2012, many refiners have shifted to a new pricing formula for its CPO supply purchases. Fixed CPO selling prices previously agreed upon between refiners and millers are no longer valid; refiners are still agreeing to take up the millers’ CPOs but only at a price based on spot CPO prices, not at the previously determined rate.
Better margins. Amid a season of high production and an environment of tightened capacity, refining margins in Sarawak have substantially improved in 4Q2012, a stark contrast to the challenging environment seen in 9M2012, which was marked by with instances of negative margins. SOP expects refining margins to remain favourable in 1Q2013, although refining profits from 2Q2013 onwards would likely experience some compression as a large bulk of Indonesia’s new refining capacity comes on-stream. This would likely lead to increased CPO prices and suppressed palm olein prices.
Better margins. Amid a season of high production and an environment of tightened capacity, refining margins in Sarawak have substantially improved in 4Q2012, a stark contrast to the challenging environment seen in 9M2012, which was marked by with instances of negative margins. SOP expects refining margins to remain favourable in 1Q2013, although refining profits from 2Q2013 onwards would likely experience some compression as a large bulk of Indonesia’s new refining capacity comes on-stream. This would likely lead to increased CPO prices and suppressed palm olein prices.
Sarawak’s production–refining capacity mismatch. Sarawak has five refineries with a total capacity to process 2.4m tonnes of CPO annually. Production within the state topped 2.9m tonnes in 2012. We believe CPO production growth in Sarawak will continue to outpace that of the country in 2013 due to its relatively late commercial planting initiative (hence, younger trees), exacerbating the mismatch in production and refining capacity.
More mills needed. Similar issues occur at the milling level as the state government looks to prevent the milling overcapacity situation seen in the Peninsular and Sabah. No independent millers are thus allowed in Sarawak, with each company needing to operate at least 5,000 ha of planted area before being given a license to construct a CPO mill. While the mill would be sufficient to accommodate its own FFBs and some external crops, severe underestimation of FFB production from smallholders within the state (those with less than 5,000 ha planted area) is causing shortages in milling capacity.
More mills needed. Similar issues occur at the milling level as the state government looks to prevent the milling overcapacity situation seen in the Peninsular and Sabah. No independent millers are thus allowed in Sarawak, with each company needing to operate at least 5,000 ha of planted area before being given a license to construct a CPO mill. While the mill would be sufficient to accommodate its own FFBs and some external crops, severe underestimation of FFB production from smallholders within the state (those with less than 5,000 ha planted area) is causing shortages in milling capacity.
More downstream investment in the cards. SOP’s own CPO production is likely to outpace its refining capacity within a few years’ time. Thus, plans are underway to expand its refinery capacity over the next two to three years on its existing 100-acre land in Bintulu to accommodate the firm’s growing production. The company is considering to double its existing refining capacity to 3,000 tonnes per day, bringing Sarawak’s total refining capacity to 2.8m tonnes per year (assuming other refineries maintain their capacity).
2013 FFB production to grow >13%. The company’s FFB production grew 5.2% y-o-y to 883,069 tonnes in 2012, slightly ahead of our forecast of 868,615 tonnes. SOP’s internal estimates forecast 2013 output to grow by at least 13.2% to breach the 1.0m-tonne mark. Our expectations are for production to grow by 15.5% to 1.02m tonnes as production reverts to its normalized growth trajectory following a suppressed 2012. CPO production increased faster than FFB last year (+11.6% y-o-y) as the company bumped up third party crop purchases.
2013 FFB production to grow >13%. The company’s FFB production grew 5.2% y-o-y to 883,069 tonnes in 2012, slightly ahead of our forecast of 868,615 tonnes. SOP’s internal estimates forecast 2013 output to grow by at least 13.2% to breach the 1.0m-tonne mark. Our expectations are for production to grow by 15.5% to 1.02m tonnes as production reverts to its normalized growth trajectory following a suppressed 2012. CPO production increased faster than FFB last year (+11.6% y-o-y) as the company bumped up third party crop purchases.
Planted land going for cheaper amid soft CPO prices. Asking prices for planted oil palm estates in Sarawak have come off its peak recently amid weak CPO prices. A planted peat area previously calling for RM60k per ha is now available at RM45k per ha. SOP finds current asking prices still on the expensive end following its recent minority interest buyback for two of its subsidiaries at RM41k per ha.
Landbank squeeze. Unplanted agricultural land prices, in contrast, have risen to RM12k per ha from the RM7k–RM10k per ha seen when CPO prices breached RM4,000 per tonne in early 2008. The company’s planted area has grown to 63,253 ha, with the remaining unplanted landbank standing at just 9.4k ha. Although the company’s medium term production prospects will not be materially affected by a slowdown in new planting, a larger landbank will be necessary to sustain long term production growth.
One of our best sector buy ideas. We value SOP at a FV of RM6.77, based on 13.0x FY13 PE. The company continues to be one of our top plantation sector buy ideas for its strong growth prospects, solid management and attractive valuations. Despite the industry-wide weak earnings in FY12 (4QFY12 is likely to be poor again in view of soft CPO prices), SOP represents particularly good value within the Malaysian plantation space. It also possesses one of the best tree age profiles in terms of near- and medium-term production growth while trading at valuations below the industry benchmark (FY13 PE - SOP: 11.2x, plantation industry: 15.0x).
Landbank squeeze. Unplanted agricultural land prices, in contrast, have risen to RM12k per ha from the RM7k–RM10k per ha seen when CPO prices breached RM4,000 per tonne in early 2008. The company’s planted area has grown to 63,253 ha, with the remaining unplanted landbank standing at just 9.4k ha. Although the company’s medium term production prospects will not be materially affected by a slowdown in new planting, a larger landbank will be necessary to sustain long term production growth.
One of our best sector buy ideas. We value SOP at a FV of RM6.77, based on 13.0x FY13 PE. The company continues to be one of our top plantation sector buy ideas for its strong growth prospects, solid management and attractive valuations. Despite the industry-wide weak earnings in FY12 (4QFY12 is likely to be poor again in view of soft CPO prices), SOP represents particularly good value within the Malaysian plantation space. It also possesses one of the best tree age profiles in terms of near- and medium-term production growth while trading at valuations below the industry benchmark (FY13 PE - SOP: 11.2x, plantation industry: 15.0x).
36% earnings growth in 2013. We believe 2013 will be a brighter year, fuelled by i) improving production, ii) better refining margins and iii) cheaper fertilizer costs, despite potentially softer average CPO prices on a y-o-y basis. Should we benchmark SOP to the plantation industry’s average FY13 PE of 15.0x, its current share price implies average CPO prices of RM2,100 per tonne for 2013. Our FY13 earnings forecast is based on CPO prices of RM2,750 per tonne.
Source: OSK
No comments:
Post a Comment