Southern Acids (M) Berhad (SAB)’s FY20 Core Net Profit (CNP) of RM33.4m came within our estimate at 104%. Sequentialdip in earnings expected due to: (i) MCO impacting its healthcare segment, (ii) stiff competition in Oleochemical segment, and (iii) muted upstream division as recovery in FFB output (QTD: +13% QoQ) is negated by lower CPO prices (QTD:-15%QoQ). Cut FY21E earnings by 26% and introduce FY22E earnings of RM37.4m. Downgrade to MARKET PERFORM with a lower SoP-derived TP of RM3.40 (from RM3.55).

Within expectations. 4QFY20 CNP of RM11.0m (+10.2x YoY; +8% QoQ) brought FY20 CNP to RM33.4m (+54% YoY). This is within our estimate at 104%, while consensus’ estimate is not available. FY20 FFB output of 91.6k MT (+5% YoY) is also within our estimate at 98%. FY20 DPS of 5.0 sen was slightly lower than our expected 6.0 sen.

Lifted by upstream. YoY, FY20 CNP leapt (+54%) mainly driven by an increase in upstream profit (+62%) on the back of: (i) higher average CPO price (+9%), and (ii) higher FFB output (+5%). Meanwhile, healthcare segment grew steadily raking in a 10% increase in segmental profit. QoQ, 4QFY20 CNP improved (+8%) mainly due to lower tax expense (-83%) and MI share of losses of RM0.5m (vs. MI share of profit of RM4.0m in 3QFY20). Had it not been for the lower tax expense and MI share of losses, the impact of 68% decline in upstream profit from lower FFB output (-16%) overshadowing higher CPO price (+15%) would have been more significant.

MCO impact to be felt in 1QFY21. We expect to see the impact of MCO on the group’s healthcare division materialising in 1QFY21. For its upstream division, the recovery in FFB output (QTD: +13% QoQ) should be negated by lower average CPO prices (QTD1QFY21: -15% QoQ), while its Oleochemical segment is likely to face demand challenges from disruption due to the virus-led global economic lockdown and stiff market competition. As such, we believe our view of a sequential dip in 1QFY21 earnings is fair.

Cut FY21E earnings by 26% after (i) reducing CY20-21E CPO price forecast to RM2,300-2,400/MT (from RM2,550/MT), and (ii) adjusting for MCO impact. We also introduce FY22E earnings of RM37.4m.

Earnings risk ahead; Downgrade to MARKET PERFORM with a lower TP of RM3.40 (from RM3.55) based on rolled over FY21E Sum-of-Parts (SoP) valuation. In our SoP-valuation, we raised our Fwd. PER for Plantation to 18x (from 15x), applying a 10% discount to upstream segment, given subsiding biodiesel risk, while maintaining Oleochemical segment at 14.0x Fwd. PER ascribing 30% discount to average of small-to-mid cap planters in light of its lower economies of scale and stiff competition in the market. For its healthcare division, we ascribed a Fwd. PER of 20x and maintain our conglomerate discount of 20% (given its relatively smaller market cap) to arrive at our SoP-TP of RM3.40. Our TP implies FY21E PER of 14.8x, which is slightly above its 3-year mean valuation.

Risks to our call include: (i) precipitous rise/fall in CPO price, and (iii) disruption from a second COVID-19 wave.

Source: Kenanga Research - 29 Jun 2020