1. 4Q FY16 Results Highlight

• Turnover declined by 13.4% to RM1.18b in 4QFY16. Despite the higher CPO prices, the lower turnover was adversely affected by lower CPO production and refined palm products.

• Consequently, both PBT and net profit also declined by 15.3% and 22.9% to RM50.52m and RM33.97m respectively.

• In 4QFY16, SOPB’s realised average CPO prices were higher at RM2,980/mt as compared with RM2,602/mt for 3QFY16.

• Nonetheless, CPO production output declined by 14.2% to 79,895 mt in 4QFY16.

FY16 Results Highlight

• In FY16, turnover grew by 17.2% to RM4.30bn. Both PBT and net profit also increased by 52.0% and 47.0% to RM188.14m and RM130.05m respectively.

• The substantial improvement in profits was driven by higher realised CPO prices of around RM2,500- 2,600/mt as compared with RM2,200/mt realised in FY15.

• FFB and CPO productions for FY16 were 13.6% and 11.3% lower due to dry spell in northern Sarawak.

2. 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. Although CPO productions declined by 14.2% in 4QFY16, it however grew by 24.9% in Jan-17. However, the impact will be mitigated by the rising CPO price which has been trending higher with the future prices averaging around RM3,000 level.

• 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. The acquisition of SYOP was completed on 22-Dec-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 29% increase in enlarged shares capital to 570m shares.

• 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.

3. Valuation and Recommendation

• In the short-term, the volatility in CPO price trend and the acquisition of SYOP might result in earnings variation for FY17.

• 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 14.2x for FY17. We have arrived at a target price of RM4.20 by ascribing discount P/E of 16x.

Source: BCT Asia Research - 28 Feb 2017