Southern Acids (M) Berhad (SAB)’s 9MFY20 Core Net Profit (CNP) of RM22.4m came above both our (79%) and consensus’ (92%) estimates, mainly due to higher-than-expected FFB output (80% of our full-year estimate). Expect sequential earnings improvement from upstream division on higher CPO prices (QTD-4QFY20: +15%). Raise FY20-21E earnings by 18- 13% on higher FY20-21E FFB output. Upgrade to OUTPERFORM with higher SoP-derived TP of RM4.25.

Above expectations. 3QFY20 CNP of RM10.2m (+24% YoY; +38% QoQ) brought 9MFY20 CNP to RM22.4m (+8% YoY), above both our (79%) and consensus’ (92%) estimates. This is mainly due to higher-than expected 9MFY20 FFB output of 71.3k MT (+6% YoY), which accounted for 80% of our full-year estimate. No dividend was declared, as expected.

Lifted by upstream. YoY, 9MFY20 CNP improved (+8%) mainly driven by a surge in profit (+37%) from upstream segment on the back of: (i) higher average CPO price (+2%), and (ii) higher FFB output (+6%). QoQ,

despite a decline in FFB (-8%), 3QFY20 CNP leapt (38%) boosted by upstream (+32%) stemming from average higher CPO price (+14%). This resulted in EBIT margin expansion (+2.6ppt) to 11.1%.

Upstream to continue delivering solid earnings. Moving forward, we expect sequential earnings improvement from its upstream division on higher CPO prices (QTD 4QFY20: +15%). Despite the fact that its Oleochemical segment should continue to face high operating cost and stiff competition in the market, we are not too concerned as upstream margins should negate the loss in its Oleochemical segment. Meanwhile, the Covid-19 could prove to be a boon for its healthcare segment.

Raise FY20-21E earnings by 18-13% (low base effect) as we increase FY20-21E FFB output by 6-7%.

Solid earnings growth; Upgrade to OUTPERFORM with a higher TP of RM4.25 (from RM4.10) 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 20% (given its relatively smaller market cap) to arrive at our SoP-TP of RM4.25. Our TP implies CY20E PER of 17.4x, which is close to its 3-year mean.

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

Source: Kenanga Research - 26 Feb 2020