Southern Acids (M) Berhad (SAB)’s 1QFY21 Core Net Profit (CNP) of RM10.1m came above our estimate at 33%due to better-than-expected downstream margin. However, sequential improvement in upstream earnings could be partially muted as ETR normalises. Raise FY21-22E CNP by 18-5% on higher downstream margin. As we are ceasing active coverage, the stock is now a NOT RATED with our revised SoP-derived TP of RM3.80 (from RM3.40).

Above expectations. 1QFY21 CNP of RM10.1m (+114% YoY; -8% QoQ) came above expectation, accounting for 33% of our full-year estimate. The positive deviation came from better-than-expected downstream margin. FY20 FFB output of 23.8k MT (+14% YoY) is within our estimate at 25%. The absence of dividend is also within expectation.

Boosted by upstream. YoY, 1QFY21 CNP leapt (+114%) mainly driven by an increase in upstream profit (+267%) on the back of: (i) higher average CPO price (+15%), and (ii) higher FFB output (+14%). QoQ, despite higher FFB output (+17%), 1QFY21 CNP slipped (-8%) mainly due to: (i) a 54% decline in healthcare profit due to MCO, (ii) higher tax expense (+208%), and (iii) MI share of profit of RM1.9m (vs. MI share of losses of RM0.5m in 4QFY20). Had it not been for the higher tax expense and MI share of profit, the impact of 108% increase in upstream profit from higher FFB output (+17%) overshadowing lower CPO price (-9%) would have been more significant.

Sequential improvement could be partially muted. While the group’s upstream division is expected to record sequential improvement in 2QFY21 on the back of higher CPO price (QTD 2QFY21: +18% QoQ), the impact could be partially muted by higher tax expense as ETR normalises closer to c.20% (from 9.9% currently). While its Oleochemical segment has improved, it is expected to continue to face high operating cost and stiff competition in the market. Higher CPO price may also translate to higher feedstock prices.

Raise FY21-22E CNP by 18-5% on higher downstream margin of 2% (vs. breakeven previously).

Cease coverage. We have opted to cease coverage on the stock for now due to resources reshuffling as well as lack of investors’ interests. Should investors’ interest or its outlook improve, we may seek to resume coverage in the future. Our latest call on the stock is now a NOT RATED (from MARKET PERFORM previously) with SoP-derived price target of RM3.80 and FY21-22E earnings forecasts of RM36.3-39.2m

Source: Kenanga Research - 26 Aug 2020