Sarawak Plantations Bhd (SPLB) 1Q23 PATAMI of RM12mn (QoQ:  +>100%, YoY: -72%) was below our and consensus expectations, accounting for only 12% and 16% of full-year forecast respectively.  Despite our cautious view for SPLB, motivated by positive  expectations for output growth and continual strengthening of  balance sheet, it is essential to acknowledge a potential caveat.  Given SPLB's as a pure planter, there is inherent risk associated with  its earnings, as it has a high correlation to the fluctuations in the  palm products price and production. Maintain a HOLD call with new TP of RM2.03 versus RM2.28 previously.

• Below expectations. 1Q23 net profit of RM12mn (QoQ: >100%, YoY:  -72%) was below our and consensus expectations accounting for 12%  and 16% of full year estimates respectively. The difference between reported earnings and core earnings is the fair value changes on  biological assets, amounting to a gain of RM1.46mn in 1Q23 against  RM17.59mn gain in 1Q22 and loss of RM12.29mn in 4Q22.

• Dividend. The Board declared an interim DPS of 5sen (1Q22: 5sen)  for FY23. At the current market price, this would translate into a DY  of 2.3%.

• QoQ. SPLB’s 1QFY3 revenue and core PATAMI declined by 29% and  39% QoQ respectively. The decline in earnings was attributable to  31% and 33% decline in sales volume of CPO and PK to 23.2k MT and  5.2k MT respectively despite an increase in CPO price to RM3,942/MT (+2% QoQ).

• YoY/ YTD. On YoY basis, earnings came in lower following a 39% YoY  drop in revenue to RM111.5mn, no thanks to 1) lower average selling  prices (ASP) realised of palm products, 2) lower sales volumes of CPO (-4.4%) and PK (-0.6%), and 3) 15.9% increase in estates cost to RM35.8mn.

• Outlook. We are cautiously optimistic on SPLB as a pure planter with  single country exposure i.e., Sarawak, given its earnings that is highly  exposed to weakness and/or strength in palm products price and  production. The downside risk to earnings in the near-term may however come from lower-than-expected ASP of palm products realise and lower-than-projected production (own crops and thirdparties) – amid management remains focus on increasing  productivity at all levels of operation and to reduce unit cost of  production.

• Our call. In view of current challenging business environment and  moderation in palm oil prices, we revised lower our FY23/24 earnings  forecast to RM58mn/RM43mn respectively from RM86mn/RM66mn  previously. Maintain a HOLD call with a new TP of RM2.03 versus RM2.28 previously based on historical low 3-year average P/BV of  0.77x that is pegged to BV/share of RM2.64. Hence, we advise investors to take any stock price rally as an opportunity to lock in  their profit.

Source: BIMB Securities Research - 24 May 2023