Sarawak Oil Palms Bhd
(Dec 18, RM5.37)
Maintain “buy” with a new target price (TP) of RM7.44: Sarawak Oil Palms (SOP) aborted its plan to acquire native customary rights land in Sarawak (first announced on March 19, 2014) after the vendors failed to obtain the consent from Sarawak’s Ministry of Land Development for the sale and transfer of their share sales.

Recall that SOP had earlier entered into a conditional share sale agreement for the proposed acquisition of a 60% equity interest in DD Pelita Sebungan Plantation Sdn Bhd and 60% equity interest in Mutiara Pelita Genaan Plantation Sdn Bhd for an aggregate purchase consideration of RM134.9 million or enterprise value per planted hectare of RM30,700. DD Pelita and Mutiara Pelita have collectively planted 9,661ha of oil palm estates in Sarawak with an average age profile of about 5½ years.

While the acquisition would have been long-term positive for SOP, we have yet to incorporate the proposed acquisition into our earnings forecasts. But we have cut our 2015 to 2016 industry wide crude palm oil (CPO) average selling price (ASP) assumptions by 7.7%/3.8% to 
RM2,400/tonnes/2,500/tonnes (previously RM2,600/tonnes) following the recent rout in crude oil prices but mitigated by a weaker ringgit.

Following the revision in our CPO ASPs, we cut SOP’s 2015 to 2016 earnings per share (EPS) by 17% and 9% respectively.

We continue to like SOP for its long-term prospects and 32% 2014 to 2016 EPS compound annual growth rate (CAGR). Key catalysts for SOP are a projected 12% 2-year 2014 to 2016 fresh fruits bunch (FFB) output CAGR, and the unlocking of its oil palm estates value near Miri via property development over the next three to five years.

Maintain “buy” with a new TP of RM7.44 as we roll forward our valuation to 15 times 2016 price-earnings ratio (previously RM6.90 on 15 times 2015). — Maybank IB Research, Dec 18

This article first appeared in The Edge Financial Daily, on December 19, 2014.