Sarawak Oil Palms (SOP)’s FY13 earnings were 16% below our full-year forecasts on weaker than expected realised palm oil  price. We expect earnings to improve this year on the back of higher palm oil prices  and production  surge  on  the  back  of  a  rise  in  prime  mature  areas.  The recent  pullback,  triggered  by  Wilmar’s  peat/deforestation  policy, presents a BUY opportunity as SOP should not be adversely affected.

• Results  below  expectations.  SOP’s  FY13  core  earnings  came  in  at MYR98.5m, which was 16% below our forecast. This was mainly due to a  lower  than  expected  realised  palm  oil  price  of  MYR2,168  per  tonne, which was about MYR100 lower than our assumed price. The company’s fresh  fruit  bunches  (GGB)  yield  declined  to  17.1  tonnes/ha  from  19.6 tonnes/ha  in  FY12  due  to  some  10k  ha  of  newly  mature  areas.  The decline  in  yield,  coupled  with  the  18%  drop  in  realised  palm  oil  price,resulted in a 37% slide in its net profit.
• Much  stronger  year  in  store.  We  expect  SOP’s  performance  to improve  substantially  this  year,  driven  by  higher  palm  oil  prices  and  a turnaround in its percentage of prime mature area s, which has declined for two  consecutive years but will rise significantly this year to 46.0% vs 41.7% last year.
• Stock price weakness a buying opportunity. We believe SOP’s stock price has been unjustly punished by  selling sparked off by  Wilmar’s “no peat/deforestation”  policy  as  the  company  should  not  be  adversely affected. This is due to the fact that: i) SOP’s landbank is largely planted up,  ii)  Wilmar  will  continue  to  buy  palm  oil  from  peat  areas  that  are already planted before  the  effective date  of its policy,  and iii)  some 40% of SOP’s planted areas are on mineral soil.
• Forecast change.  Our forecast is largely unchanged. SOP  is  trading  at under 14x FY14 earnings and 10x FY15 earnings, which is undemanding given  its  production  and  earnings  growth.  Our  fair  value  has  been tweaked  downward  slightly  to  MYR7.04  (from  MYR7.12),  based  on unchanged 16x CY14 P/E. BUY maintained.

Financial Exhibits

SWOT Analysis

Company Profile
SOP is involved in oil palm cultivation and CPO refining in the state of Sarawak.

Recommendation Chart

Source: RHB