• We believe the current high CPO price should benefit SOP immensely, as its spot sales strategy and minimum forward sales of its own crops have widened its ability to leverage on rising spot price.
• About 61% of its planted area are in prime yielding age brackets, which mean SPO is well-positioned to benefit from rising palm oil products price. Another 34% are immature-to-young mature area that provide visible revenue and earnings ahead.
• Reaffirm BUY with new Target Price of RM4.75 from RM4.50 previously. The valuation is based on average FY22/23F EPS of 36.5sen and PER multiple of 13x, which in our view, is more reflective of its potential, and fully justified given earnings will be lifted significantly in the coming quarters.

Production is expected to recover from 2022 onward

We are expecting a setback in FFB production for this year, estimated to drop by 6.5% yoy to 1.27m tonnes and averaging about 3% per annum over the next 2-years, supported by improvement in yields as more planted areas come into maturity and harvesting due to better age profile. We also estimate better productivity, as we expect the acute workforce shortage in the oil palm industry would be resolved.

Earnings growth outlook is enticing

We believe the higher CPO price will amplify the revenue and earnings growth momentum for SOP in FY21/FY22F. We are projecting a record year in 2021 with 43.0% YoY growth in net profit to RM291.8m (3-yrs CAGR of 38.6% for FY19-FY22F). We believe the increasing higher CPO price should benefit SOP, as its spot sales strategy and minimum forward sales of its own crops has widened its ability to ride on rising spot price. We project a higher average CPO price of RM4,000/MT for 2021 (SOP’s 1H21 average PO products price realised already at RM4,150/MT) whilst expecting a lower price of RM3,000/MT in 2022 on expectations that supply will improve on increase yield and productivity, due to a favourable weather condition and improvement in labour shortage in the oil palm industry.

Attractive valuation, Buy with TP of RM4.75

Reaffirm BUY with new TP of RM4.75 from RM4.50 previously, based on average FY22/23F EPS of 36.5sen and PER of 13x. We believe the stock is currently carrying an attractive valuation with 8x its 12-months forward PE, which is well below the sector’s average of 14.8x and its 5-year average forward PE of 13.4x. This suppressed PE level implies the market has not fully accorded the growth to be generated by the company, as well as potential on rising palm products prices. Conversely, it will likely establish a dividend policy soon (most probably in April next year, subject to shareholders approval) to reward shareholders, of which would help to rerate its equity value over time.

Source: BIMB Securities Research - 28 Oct 2021