The research house reiterates its ‘BUY’ call on Sarawak Oil Palm for the reason that the company being a pure Malaysian planter with minimal forward sales should bode well for the palm oil plantation player in this high-priced environment, while SOP’s downstream expansion is on the horizon and hence, should provide some growth impetus.
The valuation of the counter is seen as inexpensive, as it is traded at 6x FY22F P/E versus peers’ valuations of 6-10x.
For FY2022, management is guiding for flat YoY FFB growth, despite a 30-35% labour shortage and lower January 2022 output (-11.8% YoY). This is due to the black bunch count conducted recently and the improved weather in March.
In terms of labour shortage, SOP is hoping that Malaysia will ink the government-to-government agreement with Indonesia soon – which will enable it to start recruiting workers once borders reopen on 1 Apr. For Sarawak in particular, management is hoping that the state government will start allowing workers from Bangladesh to come in soon as well, as the test batch of Bangladeshi workers has worked out well so far. Given the flat guidance, we trim FFB growth assumptions to -0.5% to +6.0% for FY22-24 (from +1.3% to +5.1%).
SOP estimates unit costs will rise 10-15% YoY in FY2022, on the back of higher fertiliser costs. As it only completed 75% of its fertiliser application in 2021, it is able to use the unutilised fertiliser in 1H2022. Together with the lower-priced unutilised 2021 fertiliser, SOP’s 1H22 fertiliser costs are expected to rise 50% YoY. The company has yet to tender for its 2H2022 requirements. It recorded unit costs of MYR1,500-1,600/tonne in FY21 (including kernel credit of MYR400-450/tonne). We have imputed a 15% increase in unit costs for FY2022F, to be more conservative.
Volatile prices of oil palm have been good for downstream margins. SOP’s refining division performed well in FY21, although no breakdown is given. This was achieved in a rising price environment, where feedstock bought, processed and sold 1-2 months later garnered a higher ASP, resulting in margin expansion. As the utilisation rate remains close to 90%, SOP is expanding its refinery capacity by 53% to 2,300 tonnes per day at a cost of MYR40m. This will be completed in 2H2022 and will produce higher quality, tailored products for its customers. The research house have imputed this expansion into their forecasts.
The research house has however set a lower target price of MY6.05 (from the previous target price of MYR6.35) based on an unchanged 8x 2022F P/E after revising their FY22-24F earnings by -4.6% to +2.5%. They reiterated that SOP’s valuation remains attractive, as the stock is trading at 6x FY22F P/E, which is at the low-end of its peer range of 6-10x. Also, it is notable that this revised target price has taken into account a 16% ESG discount based on their in-house proprietary methodology, to account for SOP’s ESG score of 2.22. Hence, ‘BUY’ call maintained for SOP.
