- It was reported in the Press that TH Plantations plans to set up its first palm oil refinery in Sarawak.

- Construction of the refinery will begin at year-end. The refinery will have a capacity to process 1,500 tonnes of CPO per day when it begins operations in two years’ time.

- The new refinery would be financed by a RM2.5bil sukuk issue, which was raised last year.

- The cost of the refinery is expected to range between RM70mil and RM80mil, which translates into a cost of RM140/tonne to RM160/tonne.

- TH Plantations is currently conducting feasibility studies on the proposed refinery, which would produce finished palm oil-based goods.

- We are neutral on this proposal as refining margins are generally thin compared to upstream activities.

- However, we see the rationale for the setting up of the refinery.

- Currently, there is not enough refining capacity in Sarawak.

- As TH Plantations’ CPO production in Sarawak is expected to increase in the coming years, there is a possibility that the existing refineries in Sarawak may not be able to absorb all of the group’s CPO.

- About 58% of TH Plantation’s planted areas are located in the state.

- Presently, Sarawak has six refineries with total production capacity of 2.39mil tonnes/year. In comparison, CPO production in Sarawak amounted to 2.92mil tonnes in 2012.

- As the refinery will take two years to complete, TH Plantations would have enough time to set up marketing teams for its refinery. Maintain a BUY on the group.

Source: AmeSecurities