SOP  registered  9MFY12  earnings  of  RM134.2m  (-33.3%  y-o-y),  falling  short  of estimates. Weak selling prices, challenging refining margins and steeper fertilizer costs hampered profits, while over-conservatism in its refinery business dealings lowered  sales  volumes.  Its  FFB  production  growth  remains  one  of  the  best, nonetheless, with output rising by  11.7%  y-o-y in 3Q. Despite the weak earnings, SOP  provides  particularly  good  value  within  the  Malaysian  plantation  space.  Its tree  age  profile  is  primed  for  strong  near-  to  medium-term  production  growth, while  valuations  are  attractive  at  15.0x  and  9.8x  FY12  and  FY13  PER.  Maintain BUY, with FV of RM7.95.

Below estimates. SOP posted 3QFY12 revenue of RM420.8m (+29.1% y-o-y, +49.4% q-o-q)  and  earnings  of  RM40.7m  (-46.3%  y-o-y,  -21.6%  q-o-q).  The  commencement  of its  maiden  refinery  in  Bintulu  boosted  revenue  but  weak  CPO  prices,  unattractive refining  margins  and  higher  fertilizer  costs  suppressed  profitability.  The  same  reasons led  earnings  to  contract  sequentially  despite  a  38.5%  q-o-q  uptick  in  FFB  production. 9MFY12  revenue and  earnings  came  in  at  RM931.2m  (+9.2%  y-o-y)  and  RM134.2m  (-33.3%  y-o-y),  with  earnings  representing  just  60.4%  and  62.5%  of  our  and  consensus forecasts respectively. In contrast, 9MFY11 represented 82.8% of last year's full year earnings.

Estates performing reasonably. SOP's FFB production growth remains one of the best within  our  Malaysian  coverage  due  to  its  young  trees  and  good  estate  management practices. 10M2012 production grew 4.6% y-o-y, an improvement from 9M2012's 3.1% y-o-y growth. Despite making a commendable recovery so far in Jul-Oct 2012 (+12.9% y-o-y),  production  is  unlikely  to  match  our  full-year  growth  forecast  of  10.3%,  which implied  a  stronger  2H2012  growth  of  20.5%.  We  are  revising  our  full-year  growth expectations to 5.8%, implying 11.5% production growth in Nov-Dec. 3Q2012 production rose 11.7% y-o-y and 38.5% q-o-q. We expect production to grow by 11.9% in 2013.

Downstream  conservatism.  What  we  believe  has  affected  SOP's profitability  and timing of profit recognition the most this year is  its maiden venture into the downstream business.  Being  new  to  the  business,  the  company  was  particularly  conservative  in  its business dealings. To prevent defaulting on its refined palm oil sale agreements (it fears that  initial  glitches  with  its  refinery  may  result  in  insufficient  refined  oil  to  fulfill  its  sale orders), the company chose to be conservative by placing a wider time period between production  and  sale  (eg.  refined  oil  is  scheduled  to  be  produced  in  July  but  sale  is scheduled to be in August).

Selling at lower prices. SOP's refinery came on stream in June, and this delay in sale meant that most of its oil was sold at the later part of 3Q2012 (based on prices at the later part of 3Q2012).CPO prices were weaker in the later part of 3Q than at the beginning of 3Q, so SOP is seeing substantially lower average selling prices (ASPs)  compared  to  the  Malaysia  Palm  Oil  Board  (MPOB)  average  (please  see  Figure  1).  SOP  has  also chosen to agree to sell less than what it expects to produce. This is again a conservative measure due to fear that glitches at its new refinery will cause it to not be able to fulfill its sale agreements. SOP's refinery came on stream in June, and this delay in sale meant that most of its oil was sold at the later part of 3Q2012 (based on prices at the later part of 3Q2012).CPO prices were weaker in the later part of 3Q than at the beginning of 3Q, so SOP is seeing substantially lower average selling prices (ASPs)  compared  to  the  Malaysia  Palm  Oil  Board  (MPOB)  average  (please  see  Figure  1).  SOP  has  also chosen to agree to sell less than what it expects to produce. This is again a conservative measure due to fear that glitches at its new refinery will cause it to not be able to fulfill its sale agreements.

Still a good pick. We are cutting our FY12 and FY13 forecasts by 21.5% and 14.4% respectively in view of our reduced production and realized price expectations. Our FV is hence slashed to RM7.95, based on 13.0x FY13  PER.  Despite  the  industry-wide  weak  earnings,  SOP  provides  particularly  good  value  within  the Malaysian  plantation  space.  It  possesses  one  of  the  best  tree  age  profiles  for  near-  and  medium-term production growth while trading at valuations below industry benchmarks. Maintain BUY.

Source: OSK