SPB is one of the pioneers in Sarawak’s oil palm industry, with total land bank of 45,668 ha (of which 78% of it has already been planted with oil palms, with an average age of 11.3 years as of end-FY19). We anticipate SPB’s earnings expansion to sustain into the next 3 years, underpinned by higher CPO prices and FFB output (arising from increased harvestable area and more planted area moving to higher yield bracket). We believe SPB is undervalued relative to its peers, given its improving operating efficiencies and healthy balance sheet. We value SPB at RM2.89 based on 18x projected FY21 EPS of 16.1 sen (implying an upside of 50.5%).

One of the pioneers in Sarawak’s oil palm industry. SPB is principally engaged in the cultivation oil palm plantation, processing of palm oil products, and other palm oil related activities (such as seed production, cattle integration, provision of laboratory and management services, and property investment). SPB is one of the pioneers in Sarawak’s oil palm plantation industry, with total land bank of 45,668 ha (of which 78% of it has already been planted with oil palms, with an average age of 11.3 years as of end-FY19).

Improving operational efficiencies. Ta Ann emerged as the single-largest shareholder of SPB in Mar-2018. Subsequently, SPB undertook a series of transformation changes (by leveraging on Ta Ann’s experience and expertise in plantation management). The measures undertaken since 2018 have resulted in notable improvement in SPB’s operational efficiencies, evidenced by the significantly higher FFB output.

Beneficiary of high CPO price. Based on our sensitivity analysis, every RM100/mt increase in CPO price will result in our core net profit forecasts in SPB changing by RM6-7m p.a.

Healthy balance sheet. SPB had net debt and net gearing ratio of RM33.4m and 0.06x as at 30 Jun 2020. We expect SPB’s net gearing level to remain on a downtrend, arising from its ability to generate strong operating cash flow and the absence of major capex event.

Forecasts. We project SPB’s core net profit to grow 39.7%, 26.8% and 11.6% to RM35.5-50.2m in FY20-22, underpinned by (i) higher CPO prices (as we project average CPO price realised to rise from RM2,087/mt in FY19 to RM2,350/mt in FY20 and RM2,400/mt for FY21-22, in line with our sector-wide projection), and (ii) higher FFB output (arising from increased harvestable area and more planted area moving to higher yield bracket).

Fair value of RM2.89. At RM1.92, SPB is trading at EV of circa RM16,700/ha, and FY20-22 P/E of 15.1x, 12.0x and 10.7x respectively, which is undervalued compared to other mid-sized upstream plantation players. Given its improving operating efficiencies and healthy balance sheet, we believe the valuation gap between SPB and other mid sized plantation peers should narrow. We value SPB at RM2.89 based on 18x projected FY21 EPS of 16.1 sen, at lower end of our target P/E range for plantation companies under our coverage. We note that our fair value also implies EV of RM24,500/ha.

Source: Hong Leong Investment Bank Research - 12 Oct 2020