• We met-up with SPB’s management recently and felt positive on its transformation plan to improve productivity and financial performance of the company.

• Management is confident that FFB production in FY19 would grow by double-digit (>30% yoy), mainly from recovery in operational efficiency to increase palm yields and productivity.

• 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 46% and 5% yoy growth in EBITDA for FY19 and FY20, assuming an average CPO price realized of RM2,200/MT and RM2,300/MT respectively.

• The stock currently trades at 17.9x our projected earnings for 2019, slightly higher than its historical 5-yrs average forward multiple PER of 15.7x. Upgrade to Hold.

The road to recovery

Upon completion of Ta Ann’s acquisition in April 2018, SPB has undertaken several transformations at all level – both organisational and operational. The management has successfully negotiated with locals at encumbered areas and recovered some areas in Mukah region amounting c. 800ha. In FY19, in addition to on-going recovery of these encumbered area, the company is making progress to normalise 4,156ha of enhancement area identified in 2018. So far c. 250ha is already normalised, hence, expanding the harvestable area to 16,402ha. Management is confident of achieving double-digit growth in FFB production to c. >300k MT in FY19 vs. 246k MT in FY18.

A fresh review.

SPB’s earnings is highly exposed to palm product prices as it is a pure planter with highly-concentrated area (Sarawak) exposure. As such, we estimate that for every RM100/MT change in CPO price, this would translate into +/- 24% change in earnings. We expect SPB to register a PATAMI of RM25.6m for FY19F and RM28.5m for FY20F, representing growth of >100% for FY19 and 11% for FY20, mainly driven by growth in production and better margins.

Valuation and recommendation.

We peg a target price of RM1.65 for SPB based on P/BV of 0.85x (0.72x previously) and BV/share of RM1.95. The higher P/BV multiple is to reflect its operational efficiency and promising long-term earnings growth potential. SPB’s performance could have been better if not for the encumbered estates that has effected yield and production. Upgrade with HOLD recommendation.

Source: BIMB Securities Research - 18 Mar 2019