We maintain our BUY call on Sarawak Oil Palms (SOP) pending a review of  our  CPO  price  assumption.  SOP  is  on  track  to  hit  our  earnings forecast of MYR117m, although 9M13 earnings only made up 55% of our full-year estimate.  The group’s  4Q performance will likely match  its  3Q results.  Going  forward, we expect  SOP’s  growing  proportion  of  prime age  trees,  stronger  CPO  prices  and  lower  fertiliser  costs  to  drive  its earnings.

• 9M13  results in line.  We  deem  SOP’s 9M13  earnings  in line with our and  street  expectations,  despite  making  up  only  55%  of  our  full-year forecast.  This  was  because  SOP  has  recovered  from  a  very  poor  2Q, which  pulled  down  its  FY13  performance.  We  believe  SOP’s  4Q performance  will  match  or  better  its  3Q’s  given  the  stronger  average CPO  price.  Should  the  CPO  price  be  sustained  at  current  levels,  4Q CPO price will be 8% higher q-o-q.
• Production  gains  momentum.  SOP’s  production  grew  by  10.7% organically  in  9M13,  which  was  commendable  and  matched  our production expectation, which we lowered in August. We expect SOP’s production growth to strengthen next year to 19.4%.
• Profitability  improves.  We  expect  SOP’s  profitability  to  continue  to improve over the next 3-4 years as the  proportion  of its trees in prime age will increase further from the current 59% to around 85%, which will result in production growth and a reduction in its unit costs.
• Forecast. We  are maintaining our profit forecasts  for  FY13 and FY14 at this  juncture,  pending  a  review  of  our  CPO  price  assumption  with  an upward bias.  Our current FV is based on 16x CY14 earnings, consistent with the target P/Es we apply for small- and mid-sized plantation stocks.

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Sarawak Oil Palms (SOP) is involved in oil palm cultivation and CPO refining in the state of Sarawak.

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Source: RHB