• Sarawak Plantation (SPB) reported a net loss of RM10.3m in FY17 on account of impairment losses of RM43m mainly related to encumbered estates in Central region that affected c. 6,200ha of planted area.

• Revenue increased 4% to RM399.2m as ASP of CPO rose 6% yoy to RM2,761/MT aided by an increase in sales volume.

• On qoq and yoy basis, SPB posted a loss of RM37m (3Q16: profit RM8.2m; 4Q16: profit RM8.5m) as a result of lower ASP of CPO, lower sales volume of CPO and PK, and due to aforementioned impairment loss.

• We tweaked our earnings forecast lower for FY18 and FY19 to RM32.7m and RM37.3m respectively with a revised TP of RM1.64 (RM1.78 previously). Maintain HOLD recommendation.

Earnings impacted by impairment

SPB’s FY17 could be better off if not for the local encumbrances at 3 estates in Central region that ended-up with impairment of RM43m. Operating profit was actually higher by 51% to RM44.6m mainly due to higher sales volume and ASP of CPO as well as 31% decline in replanting expenses, that partly offset the lower sales volumes and ASP of PK.

Lower qoq and yoy performance.

On top of the impairment losses, the decline in net profit qoq is attributable to the effect of lower ASP realised of CPO as well as lower production and sales volume for both CPO and PK. While on yoy basis, the lower in earnings was mainly attributable to lower realised ASP of CPO and PK.

Change in earnings forecast.

We revised our earnings forecast for FY18 and FY19 lower by 8% and 7% respectively to RM32.7m and RM37.3m, as we adjusted our production lower to better reflect the lower harvested area of c. 18.8k ha (as opposed to 26.9k ha previously with the encumbrances estates). Off note, besides the 6,200ha encumbrances estates in Central region, there are also c. 1,855ha estates at SP Suai that are in dispute with local participants.

Valuation and recommendation.

We peg a target price of RM1.64 (RM1.78 previously) and maintained our hold recommendation for SPB. Our target price is based on SPB’s PER of 14x (-1 SD below 5-yrs average PER of 19.6x) and FY18 EPS. Maintain HOLD.

Source: BIMB Securities Research - 26 Feb 2018