3Q FY16 Results Highlight

• Turnover grew by 28% to RM1.13bn in 3QFY16 due mainly to higher CPO prices.

• Consequently, both PBT and net profit more than doubled to RM61.36m and RM37.49m in 3QFY16.

• In 3QFY16, consistent with the rising CPO prices, SOPB’s realised average CPO prices were significantly higher at RM2,602/mt as compared with RM2,127/mt for 3QFY15.

• This more than sufficiently offset the lower FFB and CPO production output, which saw an 11.7% decline in CPO production to 92,452 mt in 3QFY16.

• Despite the lower CPO production, PBT grew substantially by 115.1% to RM61.36m due to better profitability helped by higher CPO prices. It recorded a PBT margin of 5.4% (3QFY16) as compared with 3.2% (3QFY15).

• In 9MFY16, turnover rose by 33.5% to RM3.12bn. Both PBT and net profit more than doubled to RM137.61m and RM96.08m respectively.

• The substantial improvement in profits was driven by higher realised CPO prices despite the lower FFB and CPO productions for 9MFY16. For 9MFY16, its CPO production declined by 10.3% to 235,333 mt due to continuing dry spell in northern Sarawak.

Earnings Outlook

• Sarawak Oil Palms Berhad (SOPB) is a Miri-based mid-sized plantation company. Its principle business activity is the cultivation of oil palm and the operation of palm oil mills for the processing of palm oil and palm kernel. It ventured into downstream refinery operation in Jul-12.

• In terms of CPO production, the improving trend on a monthly basis has been inconsistent. As at endOct-16, its CPO production year-to-date was down by 12.5%.

• However, the impact will be mitigated by the projected higher CPO price for full year FY16. For 9MFY16, SOPB’s realised CPO prices stood at an average of RM2,500. In addition, the CPO prices have recently been trending higher with the future prices averaging around RM3,000 level. Previously, we had assumed an average CPO price of RM2,400/mt and RM2,500/mt respective for FY16 and FY17 as compared with RM2,207/mt realized in FY15. We have raised our price assumption to RM2,500/mt for FY16 and maintained RM2,500/mt for average CPO prices assumption for FY17.

• In Jul-16, SOPB proposed to acquire 100% of Shin Yang Oil Palm (Sarawak) Sdn Bhd (SYOP) for RM873.0m via internal funds, borrowings and a proposed rights issue. The rights issue of 2 rights at an issue price of RM2.80/share for every 7 shares had gone ex on 11-Nov-16.

• Short-term, profits will be affected by higher interest expense, higher production cost for rehabilitation programme and further, its earnings per share will be impacted by dilution effect from the proposed right issue.

• Longer-term, we are positive on the SOPB’s earnings prospects. With the enlarged group, SOPB has a much favourable crop profile with 53% and 30% of planted areas in young and prime oil palms. In addition, another 11% of total planted areas comprises immature oil palms. Immature areas coming into maturity and rising yield of the newly matured palms will drive its FFB production yield moving forward.

• There is also ample room for improving FFB yields of SYOP, which is currently yielding 14.69 mt/ha as compared with SOPB’s 18.55 mt/ha. As more immature and young palms progresses into maturity and coupled with rehabilitation efforts, SYOP’s FFB yield is expected to improve over the longer-term.

• Another 6,772 ha of SYOP’s landbank has been identified to be suitable for the cultivation of oil palms, which provides a platform for future new planting.

Valuation and Recommendation

• On an annualised basis, 9MFY16’s reported net profit to our surprise is substantially above our forecast. Upon increasing our CPO assumption for FY16, we have also increased our earnings forecast for FY16. Earnings forecast for FY17 remains unchanged in view of the volatility in CPO price trend and near-term earnings variation pertaining to the acquisition of SYOP.

• Longer-term, we like SPOB’s long-term prospects, underpinned by a favourable age profile, improving production yield, ample landbank for future planting and long-term benefits arising from enlarged SOPB group.

• Based on our EPS forecast of 26.2 sen on an enlarged shares base of 570m shares, the stock is currently trading at a P/E of 14.3x for FY17. We have arrived at a target price of RM4.20 (BUY) by ascribing discount P/E of 16x as compared with sector P/E of 18x for FY17.

Source: BCT Asia Research - 1 Dec 2016