Results Report

YTD 3Q FY17 revenue increased 9.5% vs YTD 3Q FY16, whilst PAT rose 79.4% over the same period. However, sequential margins have stopped rising as measured by 3Q FY 17 over 2Q FY 17. YTD 3Q FY17 CPO sales volume decreased 0.2% vs YTD 3Q FY 16, whilst CPO prices received by Sarawak Plantation Berhad ("SPB") increased by 12.2% over the same period. Across the Malaysian plantation sector FFB pro-duction is about 11% higher than last year. FFB production typically weakens in the last quarter. CPO prices seem poised to remain firm over the rest of the year, and thus SPB shares are expected to have little downside. 

Investment Risks

Risks to our recommendation and target price include: i) a sharp re-versal in CPO prices, ii) a stronger USDMYR exchange rate, iii) an in-crease in the general level of interest rates, and iv) a sharp slowdown in the general level of economic activity in Malaysia or among the econo-mies of the major CPO importers, which include China, India, Pakistan, Europe and the US. 

Recommendation

We downgrade our recommendation on Sarawak Plantation Berhad ("SPB") to HOLD and reduce our fair value estimate to MYR 1.54. FFB growth seems sluggish at SPB. That coupled with muted increases in CPO prices may cap profit growth a bit. Looking ahead, average ROE is likely to be maintained at levels of 4-5%, whilst P-BV stands on 0.8x trailing book value and 0.7x current year book value.  SPB recently increased its land bank by about 15%. CPO prices may have more upside this year, but not a large quantum in our view. How-ever, it is worth pointing out that SPB has a very clean balance sheet; there is about 40 sen per share in cash or about 25% of the current share price. More importantly, SPB is currently trading on a market cap/ mature ha ratio below MYR 18,000 per ha; this seems like a very good bargain. 

Company Profile

SPB's major line of business is the cultivation and milling of palm oil. The company was incorporated in October 1997 and converted into a public limited company in Feb 2000. SPB was listed in Aug 2007. The company has a total planted area of 34,837 ha, with mature acreage of 25,670 ha. Total acreage increased by 5,200 ha in 2016, some of which will begin yielding FFB in 2017-2018.

Source: Wilson & York Securities Research - 24 Nov 2017