This article first appeared in The Edge Financial Daily on April 14, 2020

Sarawak Oil Palms Bhd
(April 13, RM2.46)
Maintain buy with a higher target price (TP) of RM2.70: We hosted a conference call with Sarawak Oil Palms Bhd (SOP) and came away relieved that things were stable in Sarawak on proactive and pre-emptive strategies put in place by the management. SOP has reacted promptly to the Covid-19 pandemic and organised its estates to function effectively, restricting the movement of workers to within their respective units, with the exception of logistics.

Up to February, SOP had recorded a 2.5% year-on-year rise in fresh fruit bunch (FFB) output. Based on current weather and bunch counts, it continues to target an 8% rise in output for 2020. We maintain our 6.8% yearly growth projection for 2020. Exports to India have been affected of late due to political issues, causing import restrictions, but SOP has managed to redirect its exports to other countries. Demand from China slowed in previous months but is starting to pick up.

SOP believes that due to the current low crop season and its diversified geographical exposure (South Africa, China, the Middle East and the European Union, the impact of lower demand will not be significant in the first quarter of 2020 (1Q20), and it remains upbeat about a pickup in the second half of 2020. SOP’s refinery continues to run at close to full capacity currently.

Meanwhile, SOP has seen a 15% drop in biodiesel demand recently, likely due to the movement control order. SOP’s biodiesel plant ran at 60-70% utilisation in 2019, but this could decline to 50% in April. While this is negative, it would not have a significant impact as biodiesel contributes less than 5% of SOP’s net profit. It expects the B20 mandate to go on as planned and is going ahead with its capacity expansion (RM30 million for capital expenditure) to 200,000 tonnes per annum with completion due in 3Q20.

SOP expects unit cost to reduce to RM1,600-RM1,700 per tonne (from RM1,750 per tonne in 2019) on the back of improved FFB output. We have reduced our unit cost assumptions by 10% to account for these savings. We raise our earnings forecast for financial year 2020 (FY20) by 14.8% and leave our FY21-22 forecasts unchanged. Our TP is raised to RM2.70 from RM2.35 based on unchanged 14 times FY20 price-earnings ratio. This implies enterprise value of US$8,000 (RM34,560) per hectare, at the low end of its peers which trade in the US$8,000-US$15,000 per hectare range. — RHB Research Institute, April 13