Sarawak Plantation saw its 1HFY20 core earnings jump 4-fold to RM15.2m, bolstered by stronger CPO prices and staggering growth in FFB production. The results accounted for 40% and 47% of our and the street expectation, respectively. The results were deemed fairly in line considering that FFB production expected to larger in 2H compared to 1H. We expect to see a strong catch-up in the subsequent quarters given the current CPO price momentum and continuous growth in FFB production. No dividend was declared for the quarter. Maintain Outperform call with an unchanged TP of RM2.62 based on 18x FY21 EPS.

• 2QFY20 revenue (QoQ: -1.5%, YoY: +28.8%). The Group’s plantation sales rose 28.8% YoY to RM97.4m, led by an increase in both CPO prices and FFB production. During the quarter, FFB production jumped 48% YoY to 89,398 mt. (1HFY20: 154,669ha, making up 44% of our full-year projection). Meanwhile, average realised CPO price improved by 20.1% YoY to RM2,333/mt (1HFY20: RM2,479/mt) while average realized palm kernel price was up from RM1,008/mt to RM1,255/mt (1HFY20: RM1,417/mt). 1H 20 FFB yield increased from 6.96mt/ha to 7.87mt/ha while oil extraction rate slipped from 20.42% to 19.62%.
• 2QFY20 core earnings jumped 5-fold to RM7.6m. Excluding the change in fair value of biological assets amounting to RM11.9m, the Group’s core earnings surged 533% YoY to RM7.6m, mainly driven by stronger plantation margin. During the quarter, EBIT margin surged from 2.1% to 14.1%. 1HFY20 all-in CPO cost of production (ex-palm kernel credit and distribution and administrative expenses) averaged at RM1,680/mt vs 1HFY19’s RM1,706/mt.
• Outlook guidance. Meanwhile, management has set an aggressive FFB production growth target of 30% YoY to 364k mt this year (vs our full-year target of 346k mt) on the back of yield improvement from the enhancement area transferred to harvestable area. For Jan-July, it jumped 31% YoY to 188,208mt and we expect to see a stronger growth in the subsequent months. Management expects lower production lower in the coming months on the back of higher production yield. It expects full-year cost of production to average at RM1,650/mt. Manuring activities have slowed down in 2Q but it picked up since 3Q. Given the recent strong CPO price performance, management has locked in forward sales of 4,000mt for Aug delivery at RM2,760/mt. It also has an outstanding forward sales of 1,000mt/mth at RM2,360/mt. On the encumbered area, it is currently finalizing the recovery of 400ha in the central region. Meanwhile, it also declared 586ha new enhancement area after being transferred from the encumbered area, bringing the total enhancement area to 2,992ha as of end-June 2020. During the quarter, 425ha was replanted. Harvestable area totaled 19,219ha while immature area stood at 4,553ha.

Source: PublicInvest Research - 19 Aug 2020