Sarawak Oil Palms (SOP) 1Q23’s core net profit of RM50mn (QoQ: - 0.5%, YoY: -74%) came-in below our and consensus estimates  accounting for only 16% and 17% of full year forecast respectively.  The earnings were in declining trends since 1Q22 either due to higher production costs, lower palm products prices or productions - on the back of falling crude palm oil yield per hectare per year since  2019 (3.43 t/ha to 2.89t/ha in FY22). As such, we revised lower our  FY23/24 earnings forecast to RM197mn/RM183mn respectively  versus RM314mn/RM294mn previously as we revisit our  assumptions on production costs. Maintain a SELL call with a new lower TP of RM2.05 versus RM2.20 previously, based on historical low 3-year average P/BV of 0.5x and FY23/24 average BV/share of  RM4.10.

• Below expectations. SOP’s 1Q23 core net profit of RM49.7mn  (QoQ: -0.5%, YoY: -74%) trailed our and consensus’ expectations,  accounting for only 16% and 17% of full year forecast. The  difference between reported and core PATAMI are the fair value (FV) changes on biological assets, FV changes on derivatives  financial instruments and unrealized loss or gain on foreign  exchange.

• QoQ. 1Q23 revenue maintained at RM1,207mn (-0.1% QoQ),  whilst earnings dropped slightly by 0.5% QoQ, due to higher ASP  realised of CPO and PK that increased by +4% and +0.3%  respectively to RM3,973/MT and RM2,359/MT; despite posting a  lower FFB, CPO and PK productions during the period.

• YoY/ YTD. SOP’s 1Q23 core PBT dropped by 72% YoY to RM73mn  no thanks to lower ASP of palm oil (PO) and palm kernel (PK)  products despite improvement in FFB, CPO and PK production – Table 3. Palm oil segment margins dropped 13.2ppts to 5.7% 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.

• Outlook. We reiterate our view that SOP may face with potential  risks that could impact its earnings this year, among others, 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.

• Forecast. Given challenging business outlook amid an increase in  operational costs and moderation in palm products prices, we  revised our operational costs assumptions and hence, lowered our earnings forecast to RM197mn and RM183mn for FY23/24 from RM314mn and RM294mn previously.

• Our call. Revised lower our Target Price to RM2.05 from RM2.20  previously based on historical low 3-year average P/BV of 0.5x  and FY23/24 average’s BV/share of RM4.10. SOP remains a SELL.

Source: BIMB Securities Research - 22 May 2023