UPDATE REPORT

CPO prices have been trending higher through 3Q 19, however soybean oil prices remain sluggish. Economic conditions in Malaysia and especially Singapore continue to deteriorate. The recent interest rate cuts around the region support our cautious outlook that we noted in our previous report. Looking ahead, we expect CPO prices to trade in the range of MYR 2,200 - MYR 2,300 per MT over the next few quarters. Weakness in India’s economy, not to mention a trade tiff, and EU resistance to buying palm oil, are some of the factors that drive our cautious outlook. On a more positive note, FFB production has picked up nicely at SPB.

INVESTMENT RISKS

Risks to our recommendation and target price include: i) litigation risk, ii) a sharp reversal in CPO prices, iii) a stronger USDMYR exchange rate, iv) an increase in the general level of interest rates, and v) a sharp slowdown in the general level of economic activity in Malaysia or among the economies of the major CPO importers, which include China, India, Pakistan, Europe and the US.

RECOMMENDATION

We maintain our HOLD recommendation on Sarawak Plantation Berhad (“SPB”) whilst increasing our fair value estimate to MYR 1.70. Looking ahead, average ROE is likely to be maintained at levels of 1-5%, whilst PBV stands on 0.8x trailing book value and 0.8x current year book value.

CPO prices may have some upside 1H 20, but not a large quantum in our view. On a more positive note, SPB has a very clean balance sheet; there is about 24 sen per share in cash or about 14% of the current share price. SPB is currently trading on a market cap/mature ha ratio below MYR 18,500 per ha, which seems like a reasonable bargain. Ta Ann Holdings Bhd has taken a 30.4% stake in SPB. Looking ahead, the emergence of Ta Ann as a new shareholder augurs well for SPB’s growth prospects. Value investors will want to monitor SPB at prices below MYR 1.50; the industry is searching for ways to use more palm oil domestically.

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 2018-2019.

Source: Wilson & York Securities Research - 19 Nov 2019