Stripping out the exceptional items, Sarawak Plantation kickstarted 1QFY23 with core earnings tumbling by 65% YoY to RM9.2m. The weak results were below our and the street expectations, making up only 13% and 12%,  respectively. We cut our FY23-25F earnings forecasts by 16%-17% as we revise down our FFB production forecast and margin assumption due to lower palm kernel credit and CPO prices. Downgrade to Neutral with a lower TP of  RM2.16. A first DPS of 5sen was declared for the quarter.

• 1QFY23 revenue (QoQ: -30%, YoY: -39%). The group sales sank 39%  YoY to RM111.4m, attributed to a decline in both CPO prices and CPO  production. FFB production climbed 2.1% YoY to 63,390mt while third party purchase production totaled 60,356mt at an average buying price of  RM759/mt. 1QFY23 average realised CPO price tumbled from RM5,938/mt to RM3,942/mt while average realized palm kernel price sank from RM4,375/mt to RM1,927/mt. 1QFY23 FFB yield enhanced from 3.12mt/ha to 3.33mt/ha while OER improved from 19.93% to 20.11% on the back of quality control on the FFB input and better milling efficiency following an  upgrade last year.

• 1QFY23 core earnings dropped to RM9.2m. Excluding the change in fair  value of biological assets (RM1.5m) and gain on disposal of right-of-use  assets (RM1.4m), the Group’s core earnings tumbled 65% YoY to RM9.2m,  mainly dragged by lower plantation earnings margin. 1QFY23 all-in CPO  production cost inclusive of depreciation, windfall tax & sales tax and PK  credit) stood at RM3,110/mt (all-in cash cost: RM2,600/mt) compared to  1QFY22’s RM3,200/mt.

• Outlook guidance. Management is keeping its FFB production target of  400k mt for now despite a potential downside risk due to lower-than-expected production in the 1H. During the 1Q, enhancement area totalled  100ha with remaining of 650ha. Replanting of 100ha was carried out with a  full-year target of 2,400ha and 120ha was declared mature with a full-year  target of 900ha. Currently, it still has a total of 3,000ha plantable landbank,  which pending the availability of seedlings from its own nursery.  Encumbered area remains at 2,700ha. In view of the significant drop in fertilizer cost (NOP: -40% YoY, compound: -21% YoY) and stronger FFB  production, management is looking at lower fertilizer cost this year. Out of  the total fertilizer application, NOP, compound, urea and phosphate account for 50%, 30%, 10% and 10%, respectively. During the 1Q, fertilizer application reached 70% of the 1st round target (3 rounds p.a.). The Group  is in the midst of bringing in 30 workers and there is no worker shortage  issue amid the current low production season. Lastly, it has allocated capex  of RM60m, with RM40m allocating for replanting and remaining RM20m for mill upgrade.

Source: PublicInvest Research - 24 May 2023