Results

• Sarawak Plantations’ 2Q23 revenue and core net earnings stood at RM127.2mil and 11.9mil respectively. Both figures experienced a YoY decline, with revenue dropping by 38.5% and core net earnings by 70.7%.

• On a QoQ basis, both revenue and core net earnings has recorded strong growth of 14.3% and 37.7% respectively.

• For 1H23, revenue was registered at RM238.8mil, falling 39.0% YoY, while core net profit of RM 21.1mil has shown a steeper drop of 68.3% YoY.

• 1H23 core net profit was below expectations, meeting only 39% and 34% of our and consensus estimates mainly due to higher-than-expected operating expenses and one-off gain of fair. However, revenue was close within expectations.

• Steep drop in core earnings. The decline in 1H23 core net profit was partly owing to the softer CPO price and higher operating expenses. During the quarter, average realized CPO and PK price in 1H23 plunged by 38.0% YoY and 50.8% YoY. We reckon that the higher operating expenses in 2Q23 eroded the margin where EBITDA margin narrowed by 16.2% as compared to 2Q22, and hence dragged down the Group’s bottom-line.

• Top line recorded slower decline. The Group’s 1H23 revenue has fallen by 38.9% YoY but was supported by the improvement in sales volume, which had increased by 2.0% and 4.9% respectively.

Comments

• Strong recovery in CPO price. CPO price held up relatively well in July at RM3,897/mt, rising 10.6% MoM. We believe the strong recovery in CPO price was partly due to Russian suspension of the grain deal as well widening premium between soybean oil and palm oil. However, our assumption for CPO price remains unaltered, as we expect the upcoming rise in supply to initiate a decline in CPO prices.

• Strong production in the coming quarters. Management expects FFB and CPO production in 2H23 to be higher as compared to 1H23 due to peak crop season in August and October.

Earnings Outlook / Revision

• Our projection remains consistent, foreseeing a 40% YoY decrease in core earnings for FY23, followed by a 13% YoY recovery in FY24. Anticipating the positive influence of enhanced production in FY23 and considering the impact of El Nino on CPO prices, we anticipate an improvement in earnings in FY24.

Valuation and Recommendation

• Maintain our SELL call for Sarawak Plantation, with a target price of RM1.80 based on 8.3x PER FY23E at mean from its 3-year average forward PE.

• Risk: CPO price is highly influenced by capital flows, changing weather patterns affect FFB production, lower tax rate and import duties of Indonesia threatens local CPO demand, shortage of labours and rising operational cost.

Source: JF Apex Securities Research - 23 Aug 2023