Sarawak Plantations Bhd (SPLB)'s 1H23 core net profit fell came in below our and consensus estimates, accounting for 39% and 36% of full-year projections respectively. SPLB reported a core net profit of RM22.5mn (-66% YoY), excluding the effects of fair value changes in biological assets. Despite this, we believe earnings performance will remain steady in FY23. Any potential earnings downside is expected to be mitigated by improvements in production and the positive impact of the encouragingly realized CPO prices, which are currently trading in the range of RM3,700/MT to RM4,000/MT. Maintain a HOLD call with new TP of RM2.06 versus RM2.03 previously.

• Below expectations. 1H23 core net profit of RM22.5mn (YoY: -66%) was below our and consensus expectations accounting for 39% and 36% 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 RM6.1mn in 1H23 against RM6.9mn gain in 1H22.

• QoQ. SPLB’s 2Q23 revenue and core PATAMI increased by 14% and 13% QoQ respectively. The improved in earnings was attributable to a 19.4% and 18.7% increase in sales volume of CPO and PK to 27.7k MT and 6.2k MT respectively, despite lower realized ASP of CPO and PK to RM3,793/MT (-4% QoQ) and RM1,867/MT (-3% QoQ) respectively.

• YoY/YTD. On a YoY basis, earnings came in lower due to a 39% YoY drop in revenue to RM127.4mn (2Q23) and RM238.8mn (1H23) respectively. This was attributed to lower ASP realized for palm products (CPO: RM3,861/MT, -38% YoY; PK: RM1,894/MT, -51% YoY), despite higher sales volumes of CPO and PK. Besides, earnings have been cushioned by lower estates and mill operations costs, as well as reduced distribution costs during the period.

• Outlook. We are of the view that SPLB’s earnings performance would be sustainable, given improvement in harvestable areas and crop profile, resulting in better yield and production growth. It's worth noting that about 170ha of encumbered areas have been recovered YTD, with circa 2,530ha remaining to be recovered. Nevertheless, considering SPLB's position as a pure planter, it is pertinent to acknowledge the inherent risks tied to earnings due to the pronounced correlation with fluctuations in palm product prices and production.

• Our call. Based on FFB production guidance and our adjustments to the ASP of palm products and operational costs, we have revised our earnings forecast for FY23/24 to RM44mn/RM41mn respectively, from RM58mn/RM43mn previously. Maintain a HOLD call with a new higher TP of RM2.06, versus previous TP of RM2.03. Our valuation is derived from the hist. low 3-year avg. P/BV ratio of 0.77x, rolled forward to the average BV/share of RM2.67 for FY24-25. Therefore, we advise investors to consider using any stock price rally as an opportunity to lock in their profits

Source: BIMB Securities Research - 23 Aug 2023