We maintain  our BUY call on  SOP  with a  TP of MYR6.52  (18% upside). Although  FY14  results  came  in  below  expectations,  we  expect  SOP’s performance to be significantly  better this year. There are two catalystsdriving  its  earnings  this  year  –  a  yield  recovery  and  the  rollout  of Malaysia’s  B7  biodiesel  programme  in  Sarawak  starting  end-January, which will take up the bulk of its biodiesel production.

Earnings  below  expectations.  Sarawak  Oil  Palms’  (SOP)  FY14  core earnings  came in  12.7%  below  our  forecast  as  production  fell  short  of expectations by 5.3%.

Maintain  production  expectation.  We  believe  SOP’s  production  will bounce  back  strongly  this  year  after  a  disappointing  2014.  Hence,  we maintain our production forecast at 1.241m tonnes, which  will represent a  19%  increase  from  2014  levels.  We  continue  to  believe  that  SOP should deliver strong  earnings given its age profile, and  2014 production disappointment was weather-related.

Biodiesel  rollout.  After  some  delay,  Sarawak  finally  rolled  out  its  B7 mandatory  biodiesel  programme  at  end-January,  for  which  SOP  is the primary  supplier.  SOP’s  100,000  tonnes  per  annum  capacity  will  be largely taken up by the B7 programme.

Forecast unchanged.  We maintain our earnings forecasts for FY15 and FY16. Our TP remains largely unchanged at MYR6.52, which represents an 18% upside from current levels.

M&A.  SOP’s acquisition of a 60% stake in two  plantation companies  for MYR162.9m,  which will give it 8,000ha of oil palm land, has been called off.  Nevertheless,  given  its  healthy  balance  sheet  (33%  net  gearing), SOP is in a good position to acquire distressed assets in Sarawak.

Source: RHB