Southern Acids (M) Berhad (SAB)’s 1HFY20 Core Net Profit (CNP) of RM12.9m came within our expectation at 50%, but above consensus at 66%, likely due to seasonally higher FFB output. We have accounted for this FFB output boost; hence, 1HFY20 FFB output of 47k MT is within our estimate at 53%. No dividend was declared as expected. No changes to FY20-21E earnings. Maintain MARKET PERFORM with an unchanged SoP driven TP of RM3.65.

Within our expectations, but above consensus. 2QFY20 CNP of RM7.7m brought 1HFY20 CNP to RM12.9m, within our expectation at 50%, but above consensus at 66%, likely due to seasonally higher FFB output (+26% QoQ). However, we have accounted for this in our estimates with 1HFY20 FFB output of 47k MT coming within our estimate at 53%. No dividend was declared, as expected.

Boosted by upstream. YoY, 1HFY20 CNP declined (-18%), dragged by Oleochemicals segment’s loss before tax (LBT) of RM3.6m (vs. PBT of RM0.4m in 1HFY19) amidst high operating cost and stiff competition in the market. This resulted in Oleochemicals PBT margin compression (- 2.8ppt). QoQ, 2QFY20 CNP leapt (+48%) boosted by upstream (+317%) on a 26% increase in FFB output. The gains would have been more significant if not for Oleochemicals PBT margin compression (-1.4ppt), resulting in a higher LBT of RM2.4m (vs. LBT of RM1.2m in 1QFY20).

Plantation the shining star. Moving forward, we expect sequential improvement from its upstream division on higher CPO prices (QTD 4QCY19: +12%). However, its Oleochemical segment should continue to face high operating cost and stiff competition in the market, as unit cost is likely to be higher due to lower economies of scale, given its relatively smaller production size in the market. Meanwhile, for its healthcare segment, we continue to expect stable growth, driven by higher complex surgeries, leading to higher average revenue per patient (ARPP) as the company continues to recruit more specialists.

No changes to FY20-21E earnings as the results came within expectations.

Maintain MARKET PERFORM with an unchanged TP of RM3.65 based on Sum-of-Parts (SoP) valuation. In our SoP valuation, we maintain our average Fwd. PER of 18x, applying a 25% discount to upstream segment, given its smaller planted area. Meanwhile, we maintain Oleochemical segment at 14.0x Fwd. PER ascribing 40% discount to average of small-to-mid cap planters in light of the lower economies of scale and stiff competition in the market. For its healthcare division, we maintain our assumptions with an unchanged 24.0x PER as well as our conglomerate discount of 5% to arrive at our SoP TP of RM3.65. Our TP implies CY20E PER of 16.7x, which is close to its 3- year mean.

Risks to our call include: (i) higher/lower-than-expected CPO prices, (ii) higher/lower-than-expected cost of production, and (iii) higher/lower than-expected FFB output.

Source: Kenanga Research - 27 Nov 2019