Despite posting a strong 1HFY22, Sarawak Plantation ended the full-year FY22 with core earnings falling by 1.8% YoY to RM104.5m. This was dragged by a sharp decline in CPO production as third party FFB purchase shrank 35% YoY likely due to high FFB cost. The FY22 results were below our and the street expectations, making up 89% and 92%, respectively. Despite the dismal results, we keep our FY23-25F earnings forecasts as we have already input a lower CPO price assumption of RM3,800/mt. Maintain Outperform call with a lower TP of RM2.55 (previously RM3.32) pegged to a lower 10x FY23 EPS. No dividend was declared for the final quarter.

• 4QFY22 revenue (QoQ: -2%, YoY: -35%). During the quarter, the group sales tumbled 35% YoY to RM158.1m, attributed to a decline in both CPO prices and CPO production. FFB production climbed 5% YoY to 88,751mt (FY22: 328,450mt, YoY: +3%) while third party purchase production totaled 95,468mt, down 22%. 4QFY22 average realised CPO price sank from RM5,068/mt to RM3,861/mt (FY22: RM4,981/mt. YoY: +14%), while average realized palm kernel price retreated from RM3,558/mt to RM1,945/mt (FY22: RM2,846/mt, YoY: +4%). FY22 FFB yield stood at 16.38mt/ha (vs FY21: 15.70mt/ha) while OER rose from 19.69% to 19.77%.

• 4QFY22 core earnings was down 61% YoY to RM17.5m. Excluding the change in fair value of biological assets amounting to RM12.3m, the Group’s core earnings tumbled 61% YoY to RM17.5m, as production cost surged about 59% YoY due to an increase in upkeep, manuring, harvesting and transportation costs. 4QFY22 all-in CPO production cost (inclusive of depreciation, windfall tax & sales tax and PK credit) stood at RM2,930/mt (FY22: RM3,200mt vs FY21: RM2,100/mt).

• Outlook guidance. Management is targeting FFB production growth of 21% YoY to 400k mt for FY23. Enhancement area totaled 200ha in FY22 with an outstanding of 700ha. 550ha were replanted and is expected to see aggressive replanting of 2,300 this year. It is worth noting that FY22 replanting was below the target due to insufficient number of seedlings at its nursery. Harvestable area totaled 20,300ha while immature area stood at 4,200 as of end-2022. Meanwhile, encumbered area was lowered by 500ha with a balance of 2,700ha. Fertiliser application reached 80% of full year target in FY22. It expects to recruit another 50 Indonesian workers during the 1QFY23 following the arrival of 35 foreign workers in 4QFY22. In view of the significant drop in fertilizer cost (MOP: -40% YoY, compound: - 40% YoY) and a sharp increase in FFB production, management is looking at lower production cost this year. Despite projecting a lower price forecast of RM4,300/mt, management expects to see a favourable year for FY23, led by lower production cost coupled with a double-digit FFB production growth. The group is still finalizing agreement with Chinese partner for the 10 units of harvesting machinery, which can increase its coverage of harvesters from 1:25ha to 1:50ha. Lastly, it has allocated capex of RM50m, which is mainly catered for the replanting activities.

Source: PublicInvest Research - 22 Feb 2023