• We initiate coverage on Sarawak Plantation (SPB) with a HOLD recommendation and target price of RM1.63.

• Moving forward, growth in production is expected to come from a recovery in palm yields and an increase in new areas entering maturity, as well as into higher yielding age brackets.

• Yield could be better if not for the disturbance that started in 2010 in the encumbered estates that has curbed harvesting.

• We are projecting a 14.5% and 15.4% yoy growth in EBITDA for FY17 and FY18, assuming an average CPO realized of RM2,550/MT for both years.

• The stock currently trades at 20.2x our projected earnings for 2017, slightly higher than its historical 5-yrs average forward multiple PER of 19.6x. Initiate with HOLD

Banking on relatively young age profile

The average oil palm age profile of SPB is relatively young with approximately 41% immature and young mature age profile. The balance consists of prime mature (50%) and old mature (9%). Excluding the encumbered estates, SPB palm age profile consists of 54% immature and young mature palm with 40% prime mature palm, and the balance occupied by old mature palm aged over 20 years. As old palms attain maturity and into higher yielding age bracket, yields are poised to improve from the 5-year low of 9.22/ha seen in FY16 to 10.7/ha and 11.6/ha respectively for FY18F and FY19F.

SPB is a pure plantation company.

SPB earnings are sensitive to fluctuations in CPO prices. As such, we estimate that for every RM100/MT change in CPO price this would translate into +/- 30% change in EPS and our target price (TP).

Double digit earnings growth for FY18 onwards.

We expect SPB to register net earnings of RM22.6m and RM26.8m, representing growth of 2% and 19% for FY17 and FY18 respectively, mainly driven by growth in production and better palm oil prices.

Valuation and recommendation.

We peg a target price of RM1.63 and hold recommendation for SPB based on its 5-years average PER of 17x over its FY18 EPS. SPB’s performance could have been better if not for the encumbered estates that has effected yield and production. Initiate coverage with HOLD recommendation.

Initiate with HOLD recommendation

We peg a target price of RM1.63 for SPB, although valuations are currently on the rich side compared to Hap Seng Plantations (HAPL). This is in view of the relatively lower earnings growth prospects mainly caused by 27% of its land bank under dispute with local and participants. SPB current valuation implies a 19.8x 12 months forward PE, which is slightly higher than its historical 5-year average forward PE of 19.6x, but still below its peak multiple of 30.7x in 2 Jan 2015. Our valuation is based on SPB’s 5-year average PER of 17x which we think is justifiable given that i) 54% of its harvest area is productive, and ii) it has a young age profile - bigger immature and young mature planted areas that may provide visible revenue and earnings growth moving forward. Initiate coverage with HOLD recommendation.

Source: BIMB Securities Research - 27 Jul 2017