• SOP’s recorded a core PATAMI of RM58.7m in 9M18, as revenue fell 28% mainly attributed to lower palm products ASP realized.

• Overall, earnings came in within our expectation, making up 76% of our full year forecast but trailed consensus’ estimates at 52%.

• On qoq, PATAMI was RM17.7m vs. RM10.5m in 2Q18 on higher revenue and higher margins in plantation and property segments.

• We lowered our earnings forecast for FY19 and FY20 as we believe the lower trend of palm products prices and higher cost would continue. Our TP is revised to RM2.46 (RM3.23 previously).

Earnings within expectations

SOP’s 9M18 revenue and PBT plunged 28% and 69% respectively to RM2,549.6m and RM87.4m mainly due to lower plantation margins attributed to lower ASP realised of palm products. Higher finance costs of RM15.6m (+16% yoy), administrative expenses of RM25.1m (+8% yoy), and unrealised forex loss and fair value changes on biological assets amounting to RM5.1m contributed to the weak results. The improved production during the period failed to offset the decline in ASP of palm products. Hence, EBITDA margin fell to 8.8% from 11.7% recorded in 9M17.

Healthier qoq performance

On qoq basis, PBT increased 62% to RM30.7m on higher production and transacted palm products volume. The higher FFB, CPO and PK productions (Table 2) and volume transacted helped to mitigate a weak ASP of palm products; improving plantation segment margin to 4.6% in 3Q18 from 4.1% in 2Q18.

Change in earnings forecast

With limited catalyst in 2019, plantation companies are likely to continue to be vulnerable to several challenges, in our opinion. We believe that earnings upside, if any, would still be limited by lower ASP of palm products and higher costs of production. As such, we revised our earnings forecast for FY19 and FY20 lower to RM78m and RM92m respectively from RM142m and RM159m previously, as we adjusted our: 1) ASP of palm products assumptions lower by 4%-8%, and 2) EBITDA margin lower from 10-11% to 7-8% in view of higher administrative and operational costs.

Maintain to HOLD with new TP of RM2.46

As a result of the earnings changes, we have revised our target price to RM2.46 (RM3.23 previously). The valuation is based on SOP’s historical 5-yrs average PER of 18x and FY19F EPS.

Source: BIMB Securities Research - 29 Nov 2018