We initiate coverage on SAB with an OUTPERFORM call and TP of RM5.35 based on Sum-of-Parts. Its integrated plantation operations combine good long-term FFB growth with above-average processing margins, while the Healthcare segment is on track for expansion to support average revenue growth. This is rounded out by a solid balance sheet with net cash of RM164m (RM1.19/share) supports both expansions and a steady dividend payout of 5.0 sen/share.

Integrated plantation businesses with a natural hedge. Southern Acids (M) Berhad (SAB) was formed in 1980 with three core segments, namely Oleochemical (49% of FY17A revenue), Milling & Estate segment (“Plantation Upstream”; 38%), Healthcare segment (11%) and the Investment & Services segment (“Others”; 2%). Its integrated plantation operations have historically recorded an inverse correlation between the oleochemical and plantation upstream division, as lower CPO prices on upstream side lead to lower feedstock prices in the downstream side. This leads to a natural hedge against CPO price volatility, ensuring consistent profitability for the group’s Plantation businesses.

Expansions to enhance Healthcare growth. We are positive on SAB’s expansion plans in its Healthcare segment where it owns and operates the Sri Kota Specialist Medical Centre (Sri Kota), its flagship 232-bed tertiary private medical centre in Klang. The company has planned for c.RM26m capex for FY18E, of which c.RM20m is to be allocated for the enhancing and expanding of one of its core disciplines (cancer, spine, heart centres), while the remaining is allocated for licensed bed expansion of c.20 beds/year through FY19E. We expect these expansions to contribute to the Healthcare segment operating margin expansion trend, from 18-23% in FY16-17A to 24% in FY18-19E. This compares very favourably to local large-scale hospital players such as IHH at 15% operating margins and KPJ at 8%.

Strong balance sheet to support expansions. SAB balance sheet remains healthy with a net cash position of RM163.6m (RM1.19/share) supporting dividend payments of RM6.8m (14-15% payout). Note that SAB is a consistent dividend payer with 5.0 sen DPS annual payout since 2009. We understand that SAB’s net cash position provides for future expansion plans without the need for cash calls. Should SAB expand on its plantation estates, we estimate that SAB could gear up to c.RM450m (assuming net gearing of 50%) which could support the purchase of c.7.1-21.4k ha of brownfield/greenfield area, substantially boosting SAB’s total landbank by 1.5x-4.6x to 11.7-26.0k ha. Should management expand its plantation landbank, this would be the third major land acquisition since 5.3k ha in 2002. Nevertheless, SAB has since added a 60TPH palm oil mill which was commissioned in 2015.

Initiating coverage with an OUTPERFORM call with TP of RM5.35 based on Sum-of-Parts with an implied SOP Fwd. PER of 14.9x against their historical average of 21.1x. We value SAB’s plantation upstream business at 16.0x PER, in line with the small-cap upstream average as SAB’s solid OER and rising long-term yield outlook offsets weak shortterm FFB growth. We apply a 15.0x PER to the Oleochemical division for a 5% discount to the upstream small cap average, very conservative compared to larger integrated players with Fwd. PER of 22-27x. Meanwhile we apply a Healthcare Fwd. PER of 18.0x, is in line with the small cap segment average. We also include a conglomerate discount of 15% for adjusted Sum-of-Parts valuation of RM732m, implying a TP of RM5.35 for which Total Return is 17.1% (16.0% upside; 1.1% DY). With positive earnings expectations of 13-9% in FY18-19E, good expansion outlook and a solid balance sheet position, we initiate our coverage on SAB with an OUTPERFORM call.

Source: Kenanga Research - 27 Sept 2017