This article first appeared in The Edge Financial Daily on May 25, 2018

Sarawak Oil Palms Bhd
(May 24, RM3.29)
Upgrade to buy with unchange target price (TP) of RM4.15: Sarawak Oil Palms Bhd reported first quarter of financial year 2018 (1QFY18) core net profit of RM30 million (-39.9% quarter-on-quarter [q-o-q]; +16.3% year-on-year [y-o-y]). Results were within expectations, accounting for 19% of our full-year estimate. 1Q is generally the weakest quarter for Sarawak Oil Palms due to seasonally weaker fresh fruit bunch (FFB) production (1QFY10 to 1QFY17 contributed 6% to 26% of full-year net profit estimates). Moreover, we are expecting a stronger second half of FY18 on the back of higher FFB production and yield.

Core net profit declined 39.9% q-o-q in 1QFY18, mainly due to weaker FFB production and lower crude palm oil (CPO) average selling price (ASP).

Meanwhile, the stronger y-o-y performance was mainly supported by higher FFB production which offset the weak CPO ASP. Moreover, its effective tax rate was lower at 24.9% in 1QFY18 (1QFY17: 28.7%).

For 1QFY18, FFB production grew 14.5% y-o-y. We maintain our FFB production forecast of 1.51 million tonnes for 2018, up 15% y-o-y. Our forecast is slightly more conservative than management’s 1.55 million tonnes, mainly because FFB supply from the Murum estates might be low in 2018 as it will take time for Sarawak Oil Palms to improve its infrastructure system in those estates. Moreover, the labour shortage and recent higher rainfall have affected harvesting activities in January 2018.

We forecast net profit of RM156 million, RM182 million and RM184 million for FY18, FY19 and FY20 respectively.

We upgrade our call to “buy” (from “hold”) but maintain our target price of RM4.15, based on 13 times 2019 forward price-earnings, or -1 standard deviation of its five-year mean, in line with peers’ valuation. We upgrade our call to “buy” as the share price has weakened significantly since January 2018 (-16%) and we believe the expected CPO price weakness for 2018 has been priced in. — UOB Kay Hian, May 24