SOP’s  2QFY13  results  were  steeply  below  our  and  consensus expectations due to worse than expected drag from young mature area. We  are  maintaining  our  BUY  recommendation,  with  our  FV  lowered  to MYR6.05 from MYR6.84 previously. Despite the poor results, we believe SOP will show substantially stronger 2H profits on firm seasonal rise in production.  
 
- Poor 2Q results. Despite 2Q fresh fruit bunches (FFB) production being 10.4% higher and average crude palm oil (CPO) price being flat, SOP’s 2Q  net  earnings  fell  by  94.4%  q-o-q  to  just  MYR1.2m.  Besides  thinner refining  margin,  Management  indicated  that  its  two  subsidiaries  which hold a collective 7k ha of newly mature area, lost in excess of MYR30m in  1H  due  to  low  yields  and  depressed  CPO  prices.  SOP’s 1H  net earnings  of  MYR22m  made  up  only  15%  of  our  full-year  forecast  of MYR146m and 14% of consensus estimates.  

- Trimming  forecasts.  Despite  expecting  2H  performance  to  be  sharply better than 1H, we are slashing our FY13 earnings forecast by 19.5% to MYR117m from MYR146m previously. This is to take into account higher than expected cost of production from weaker than expected production. Our  FFB  production  forecast  has  been  lowered  to  977k  tonnes  from 1,019k  tonnes  previously,  implying  a  10.7%  growth.  We  also  trim  our FY14  earnings  forecast  by  9.2%  to  MYR169m  from  MYR187m previously,  factoring  in  a  higher  CPO  production  cost  per  tonne  of MYR1,461, from MYR1,376 previously.

- Maintain  BUY.  Despite  the  weak  quarterly  results,  we  are  maintaining our  BUY  call  on  SOP  as  we  believe  its  2H  earnings  will  be  sharply higher. Our MYR117m earnings forecast for  FY13 implies that SOP will register a MYR94m earnings in 2H.  SOP’s July FFB production number of  101k  tonnes  was  a  sharp  35%  rise  from  June  production.  It  also boosted SOP’s 7M13  production  growth  to  11%  compared  to  9%  as  at end 1H. Moreover,  the drag from its newly mature area will also reduce going  into  next  year.  Maintain  Buy  with  FV  downgraded  to  MYR6.05, based on unchanged parameter of 16x CY14 earnings. 

Source: RHB