Sarawak Oil Palms (SOP) 1H23’s core net profit of RM97.6mn (-72% YoY) came in within our estimates but trailed consensus expectations, representing 49% and 41% of full year forecast respectively. We expect earnings to improve for its upcoming 3Q22 results, powered by improved production that could offset lower downstream margins and the possibility of lower-than-expected CPO and PK average selling prices (ASP) realized. Nonetheless, it is worth noting that earnings have been on a declining trend since 1Q22, either due to higher production costs, lower palm product prices, or reduced production. Maintain a SELL call with a TP of RM2.05, based on historical low 3-year average P/BV of 0.5x and FY24/25 average BV/share of RM4.10.

• Within expectations. SOP’s 1H23 core net profit of RM97.6mn (YoY: -72%) came in within our estimates but trailed consensus’ expectations, representing 49% and 41% of full year forecast respectively. 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. On quarterly basis, revenue and core earnings dropped by 2.6% and 3.7% respectively to RM1,175mn and RM47.9mn, due to LBT in property segment of RM0.27mn and higher production costs in palm oil segment; despite posting a slight increase in ASP realised of PO products (+1%) and higher productions of FFB (+1%), CPO (+4%) and PK (+2%) during the period.

• YoY/ YTD. SOP’s YoY/YTD core PBT dropped by 69%/71% to RM66.6mn/RM139.6mn, no thanks to lower ASP of palm oil (PO) and palm kernel (PK) products as well as a decrease in FFB, CPO and PK production – Table 3. Palm oil segment margins dropped 11.4ppts to 5.7% in the 1H23 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 potential risks that could impact its earnings this year. These risks, among others, include: 1) production continuing to be below potential due to lower yield, 2) a possibility of significant pullback in palm product prices, and 3) higher operational costs. These concerns are compounded by the possibility of margin squeeze resulting from elevated costs and sluggish sales in the downstream segment, as well as slow sales and uptake in the property segment.

• Forecast. No change in earnings forecast.

• Our call. Maintain SELL call with a Target Price to RM2.05 based on historical low 3-year average P/BV of 0.5x and FY24/25 average’s BV/share of RM4.10.

Source: BIMB Securities Research - 28 Aug 2023