Warrants/Loan Stocks Update: Sarawak Oil Palms worth a look

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Hunting for warrants that are in the money and want to know which underlying assets are good? If so, plantation counter Sarawak Oil Palms Bhd’s (SOP) is probably worth a second look.

Based on SOP’s closing at RM2.01 last Friday, the company’ warrants, which has an exercise price of 72.5 sen after an adjustment for a one-for-one bonus issue in August last year, is in the money. The SOP warrant price fell five sen from a week ago to end trading last Friday at RM1.05. The warrants have a gearing of 1.9 times, and expire in 684 days in January 2011, when analysts believe the down cycle will have ended. There are about three million warrants still outstanding from the 13.5 million warrants issued.

The mother share price shed close to 30 sen over the past two weeks, to end at RM2.01 last Friday. The fall in the company’s share price was a result of the uncertainty in crude palm oil (CPO) prices. There are lingering concerns over plantation counters that have seen a slump in earnings in the just concluded reporting season. SOP’s earnings have not been spared either. Late last month, the company released its financials for the year ended December 2008. The company posted a net profit of RM139 million on the back of RM683.8 million in revenue, which is an improvement of about 27% and 55.6% from a year ago.The jump in profits came mainly from the early part of the year. This is well reflected in the earnings in 4Q2008. During that quarter, SOP’s net profit and revenue were 74.3% and 27.3% respectively lower than the corresponding period a year ago.

Nevertheless, the depleting inventory raised hopes of a stronger rebound on the CPO prices. In January, Malaysia’s CPO inventory was at 1.83 million tonnes, down from its peak of 2.27 million tonnes last November. The drop in stockpile was due mainly to lower CPO production of about 1.33 million tones.

“This could bring some cheer to the sector, which has been ravaged by falling CPO prices,” says an analyst. It is also noteworthy that SOP has been taking measures to ensure its earnings are buffered from the dip in CPO prices.Last September, SOP entered into a joint venture agreement with Pelita Holdings Sdn Bhd to develop a 14,500ha tract in Ulu Undop in the Native Customary Rights Land Development Area in Sri Aman, Sarawak, into an oil palm plantation. This nudges up SOP’s plantation land bank to almost 70,000ha, which is comparable to that of giants such as Kulim (M) Bhd which has over 80,000ha.

According to research reports, this new joint venture may start contributing as early as in two to three years’ time. Of the 14,500ha, some 8,000ha are likely to be planted with oil palm.

Pelita is a subsidiary of the Land Custody and Development Authority of Sarawak and one of SOP’s major shareholders with some 26% equity.

In a research report released in January, AmResearch says it has a “buy” call on SOP, as it is a pure plantation player and stands in good stead to benefit from strengthening CPO prices. AmResearch says, “SOP’s potential lies in its young oil palm trees, which place the group in a good position in the long term. We see potential for fresh fruit bunch yield enhancements in the future as more of the young trees enter the prime age of 7 to 15 years old. About 55% of SOP’s trees are between four to 10 years old while 26% are less than three years old.”

The research house also forecasts SOP’s earnings to improve as a result of higher margins. AmResearch upgraded SOP to a “buy” with a fair value of RM2.65, which is almost a 32% premium to its close last Friday.This article appeared in The Edge Malaysia, Issue 745, March 9-15, 2009