• Overview. Sarawak Oil Palms (SOP) 4Q22 core PBT came in lower or at 60%  YoY to RM79mn no thanks to lower average selling price (ASP) of palm oil  (PO) and palm kernel (PK) products despite improvement in FFB, CPO and PK  production to 327.6k MT, 103.8k MT and 22.9k MT during the period. This was also dragged by 1) higher cost of sales amounting to RM1,128mn (+3.5%  YoY) on account of higher production costs due to higher fertiliser prices, labour costs and programme variance in fertiliser’s application as well as higher diesel costs, and 2) higher share of loss from joint venture amounting to a loss of RM1.9mn (+53% YoY). On a quarterly basis, the lower profit was due to lower ASP of palm products and a 4% increase in cost of sales (Table  2 and 3).

• Against estimates: Below. SOP overall performance in FY22 was below our estimate, with core PATAMI of RM501mn (+9% YoY) making up only 88% of our full year forecast, being affected by an increase in production cost and a  4% drop in production despite comparable ASP realised of palm products prices. The difference between reported PBT and core PBT are the fair value changes on biological assets, fair value changes on derivatives financial instruments and unrealized loss/gain on foreign exchange. Conversely, for PATAMI versus core PATAMI, the variance is due to effective tax rate.

• Outlook. We reiterate our view of SOP’s upside risks for earnings for this year would cause if 1) production continues to be below potential due to lower yield, 2) a huge pullback in palm product price, and 3) higher operational costs. This will be added by the possibility of margins squeeze due to higher costs and slow sales in the downstream segment as well as slow sales and uptake in property segment.

• Our call. Given challenging business outlook amid an increase in operational costs and moderation in palm products price, we revise lower our FY23  earnings forecast to RM314mn versus RM412mn previously; as we revisit our assumptions on PK prices and operational costs to be more reflective of current and future expectations. Hence, a change in our Target Price to RM2.20 (based on historical low 3-year average P/BV of 0.53x and BV/share of RM4.16) from RM2.95 previously. Downgrade our call from a HOLD to a SELL.

Source: BIMB Securities Research - 1 Mar 2023