• SOP’s recorded a core PATAMI of RM37.9m in 1H18, as revenue fell 27% due to lower ASP realized for palm products and decline in volume of palm products.

• Overall, earnings came in below expectation, making up only 25%/22% of ours and consensus’ full year estimates.

• Higher administrative expenses, finance costs and depreciation also aided to the poor performance.

• On quarterly basis, PATAMI was RM6.8m vs. RM31.1m in 1Q18 on account of lower revenue and lower margins in both plantation and property segments.

• We revised lower our earnings forecast for FY18 and FY19 with new TP of RM3.23 (RM3.49 previously) as we believe the lower trend of palm products prices would continue to be a drag on earnings moving forwards.

Earnings below expectations

SOP’s 1H18 revenue and PBT dipped 27% and 71% respectively to RM1,679m and RM57m as lower transacted palm products and average realised price dragged earnings lower. Higher finance costs of RM28.97m (+15% yoy) and administrative expenses of RM15.69m (+77% yoy) contributed to the weak results. The improved production during the period failed to offset the decline in ASP of palm products. Hence, PBT margin fell to 3.4% from 8.4% recorded in 1H17.

Weaker qoq performance

On qoq basis, adjusted PBT dropped 64% to RM15.2m as there was a decrease in transacted palm products volume and palm products average selling price realised. The higher FFB, CPO and PK productions (Table 2) failed to mitigate a weak ASP of palm products. ASP realised of PO products and PK products slumped 8% and 21% respectively to RM2,352/MT and RM2,041/MT.

Change in earnings forecast

Although management is optimistic that production will increase in the coming quarter, we believe that earnings upside would still be limited by lower ASP of palm products and higher costs of production. As such, we revised our earnings forecast for FY18 and FY19 lower to RM77m and RM142m respectively from RM153m and RM194m, as we adjusted our 1) production lower by 5% to 1.39m MT based on 44:56 production ratio for 1H:2H; 2) lower ASP of palm products assumptions by 4%-8% and 3) EBITDA margin lower from 10-11% to 7- 9% in view of higher administrative and operational costs.

Recommendation change to HOLD

Changed Target Price to RM3.23 (RM3.49 previously) based on SOP’s 12-months forwards PER of 13x and FY19F EPS.

Source: BIMB Securities Research - 30 Aug 2018