SOP recently built its fourth palm oil refinery in Bintulu as it seeks to move across the value chain. The facility will help ease the company's CPO backlog as refining capacity  remains  inadequate  in  Sarawak.  While  Malaysia's  refining  landscape remains challenging, we believe that an integrated business model like SOP's will better  position  the  company  in  weathering  any  difficulties,  as  opposed  to  being downstream-heavy. SOP remains our top Malaysian plantation pick, with its young tree age profile and strong management expertise as the key drivers of growth for the next few years. Maintain BUY, with a FV of RM9.37.
 

Solely  Sarawak-focused.  Sarawak  Oil  Palms  (SOP)  is  a  Sarawak-based  oil  palm producer with the majority of its plantations located near Miri and Bintulu. Previously, the company only focused on cultivating and harvesting oil palms and processing fresh fruit bunches  into  crude  palm  oil  and  palm  kernel.  It  has  now  ventured  downstream, beginning  with  the  construction  of  a  1,500-tonne  per  day  refinery  and  a  500-tonne  per day kernel crushing plant in Bintulu, Sarawak. The company has a sizeable planted area of 62,948 ha, with 68.2% of its trees at or below 10 years old.

Going downstream in the state's deepest port.  SOP's Bintulu refinery commenced operations  in June,  processing  its  own  CPO  as  well  as those  from  neighbouring millers into refined, edible palm olein and stearin. Following a briefing on the refinery's structure, the  plant  managers  gave  us  a  quick  tour of the company's automated  refinery  and mechanical kernel crushing plant. The processing of crude to its ultimate refined form at temperatures  of  as  high  as  260''C  takes  approximately  1.5  hours.  It  takes  a  full  day  to warm  up  the  refinery  and  another  day  to  shut  down  the  plant.  The  refinery,  thus,  runs around the clock, with scheduled periodic shutdowns for maintenance.

Buying over minorities. SOP's strategy is to venture upstream in collaboration with its major  stakeholders  Shin  Yang  and  PELITA,  a  Sarawak  state  agency.  The  company currently owns 60%-85% stakes in the estates under its care. Plans are now under way for it to buy over the minority stakes, which will help reduce the minority interest leakage on its profits. SOP prefers to transact in cash, although some parties prefer to be paid in shares in order to remain invested in the company.  

Maintain  BUY.    We  value  SOP  at  a  FV  of  RM9.37,  based  on  13.0x  FY13  PE.  SOP  remains    our    top    Malaysian    plantation    pick    given    its    young    tree    age    profile, attractive  valuations  and  strong  management  expertise.  The  stock  is  trading  at undemanding 12.8x and 9.1x FY12f and FY13f PEs.

Source: OSK