• Sarawak Plantations Bhd (SPLB) core PBT came in higher or by 62.9% YoY to RM52.8mn on account of higher average selling prices (ASP) realised of palm products despite lower sales volumes of CPO and PK. This was also added by a 7.7% improvement in cost of sales amounting to RM134.5mn on lower FFB purchase. On quarterly basis, the 35% increase in core PBT was attributed by a 9.4% increase in ASP realized of CPO to RM6,496/MT, and an increase in FFB production and sales volumes despite higher production costs and distribution expenses during the period. CPO/PK sales volume increased QoQ or by 5.6%/7.2% respectively to 25,625 tonnes/5,594 tonnes.

• Against estimates: Inline. SPLB’s 1H22 core PBT was within our estimates, making up 54% of our full year forecast - on higher realised ASP of palm products despite lower sales volumes of CPO and PK.

• Key highlights. The QoQ performance was partly negated by the 12.8% increase in estates and mill operations costs of RM212.6m resulting from the higher FFB purchase price, manuring and upkeep cost, and the windfall tax paid c. RM7.9mn (2Q21: RM7.1mn) based on higher CPO recorded during the period. Of note, SPLB managed to sign a mutual agreement on area covering about 170ha in July 2022 in an effort to recover encumbered area and to do a rehab work on these areas.

• Outlook. SPLB is our top pick within the sector’s small-mid cap space, supported by its undemanding valuation, favourable output growth prospects and improving balance sheet. The only caveat is that its earnings are highly correlated to the CPO price movement. Moving into next year, although CPO prices could moderate going forward, we believe the pullback could be less severe than in previous cycles, driven by structural changes in the plantation sector.

• Our call: Maintain a BUY call with a TP of RM2.85 based on P/BV of 1.0x and BV/share of RM2.85.

Source: BIMB Securities Research - 24 Aug 2022