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.
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Source: OSK