Industry-wide earnings plummeted in 2012, weighed down by a 11.8% drop in CPO prices, weaker-than-expected production and increased fertilizer costs. We believe that  earnings  will  spring  back  in  2013,  driven  by:  i)  lower  fertilizer  costs,  ii)  a recovery in production from 2012's depressed levels, and iii) firmer CPO prices on the  back  of  lower  stockpiles.  We  see  SOP  outperforming  its  peers  due  to  itsfavourable  tree  age  profile  and  strong  near-  and  medium-term  production  growth, as well as a management that knows how to get the most out of its trees. Maintain BUY, with FV of RM6.77.

Young  and  vibrant.  Despite  industry-wide  weak  production  in  2012,  SOP's fresh  fruit bunches (FFB) production growth  was one of the highest within our Malaysian coverage due to its young trees and good estate management practices. 11M2012 production grew 6.5%  y-o-y,  improving  from  10M2012's 4.6%  y-o-y  growth.  Monthly  production  y-o-y accelerated  by  24.9%  in  November  2012,  a  stark  contrast  from  the  contraction  seen  in 1H2012. We believe  SOP's production  will  revert  to  a  normal  growth  trend  in  2013,  with output increasing by a decent 11.9% in 2013. Some 68.2% of the company's trees are still at or below 10 years old, which provides ample room for organic production expansion in the medium term.

More  benign  downstream  environment.  Being  new  to  the  refining  business,  SOP  has been  particularly  conservative  in  its  business  dealings.  To  avoid  initial  glitches  that  may could force it to default on its refined palm oil sale agreements, the company chose to be conservative  by  lengthening  the  gap  between  production  and  sale  (e.g.  scheduling  to produce refined oil in July but selling the product in August). However, as palm oil prices have  plunged  sharply  since  July,  this  move  led  to  losses,  forcing  SOP  to  sell  its  refined products below cost. Since then, refining margins have widened  and downstream profits are likely to improve further next year following the Government's long-delayed initiative to abolish tax-free CPO exports beginning January 2013.

A  more  bountiful  2013.  In  view  of  weaker-than-expected  production  and  prices,  SOP's FY12 earnings will likely come in 32.4% weaker than that in FY11. Nonetheless, we see a meaningful recovery in 2013. Our estimate is for FY13 earnings to surge 38.2% as CPO price averages RM2,750 per tonne and FFB production rises to 1.05m tonnes.

Maintain  BUY.  We  value  SOP  at  a  FV  of  RM6.77,  based  on  a  13.0x  FY13  PE.  The company  continues  to  be  a  BUY  as  well  as  our  top  Malaysian  sector  pick  for  its  strong growth  prospects  and  solid  management.  Despite  the  industry-wide  weak  earnings  in FY12,  SOP  represents  particularly  good  value  within  the  Malaysian  plantation  space.  It possesses one of the best tree age profiles in terms of near- and medium-term production growth and is trading at valuations below the industry benchmark.

Source: OSK