• Maintain BUY, new MYR6.05 TP from MYR6.35, 10% upside with c.2% FY22F yield. Being a pure Malaysian planter with minimal forward sales should bode well for Sarawak Oil Palms in this high-priced environment, while its downstream expansion should provide some growth impetus. Its valuation remains inexpensive – trading at 6x FY22F P/E, vs peers’ 6-10x

• For FY22, management is guiding for flat YoY FFB growth, despite a 30-35% labour shortage and lower January 2022 output (-11.8% YoY). This is due to the black bunch count conducted recently and the improved weather in March. In terms of labour shortage, SOP is hoping that Malaysia will ink the government-to-government agreement with Indonesia soon – which will enable it to start recruiting workers once borders reopen on 1 Apr. For Sarawak in particular, management is hoping that the state government will start allowing workers from Bangladesh to come in soon as well, as the test batch of Bangladeshi workers has worked out well so far. Given the flat guidance, we trim FFB growth assumptions to -0.5% to +6.0% for FY22-24 (from +1.3% to +5.1%).

• Minimal forward sales have been done so far, with only 6,000 tonnes sold at around MYR3,800/tonne early this year. Management is of the view that prices would remain elevated in 1H22, followed by a decline in 2H22 if cropping patterns improve and if there is any change in biodiesel mandates globally. As such, it is not participating in any forward sales at the moment, but this may change in the latter part of the year.

• SOP estimates unit costs will rise 10-15% YoY in FY22, on the back of higher fertiliser costs. As it only completed 75% of its fertiliser application in 2021, it is able to use the unutilised fertiliser in 1H22. Together with the lower-priced unutilised 2021 fertiliser, SOP’s 1H22 fertiliser costs are expected to rise 50% YoY. The company has yet to tender for its 2H22 requirements. It recorded unit costs of MYR1,500-1,600/tonne in FY21 (including kernel credit of MYR400-450/tonne). We have imputed a 15% increase in unit costs for FY22F, to be more conservative.

• Volatile prices have been good for downstream margins. SOP’s refining division performed well in FY21, although no breakdown is given. This was achieved in a rising price environment, where feedstock bought, processed and sold 1-2 months later garnered a higher ASP, resulting in margin expansion. As the utilisation rate remains close to 90%, SOP is expanding its refinery capacity by 53% to 2,300 tonnes per day at a cost of MYR40m. This will be completed in 2H22 and will produce higher quality, tailored products for its customers. We have imputed this expansion into our forecasts.

• Reiterate BUY, with a lower TP of MY6.05 (from MYR6.35) based on an unchanged 8x 2022F P/E after revising our FY22-24F earnings by -4.6% to +2.5%. SOP’s valuation remains attractive, as the stock is trading at 6x FY22F P/E, which is at the low end of its peer range of 6-10x. Note that our TP has imputed a 16% ESG discount based on our in-house proprietary methodology, to account for SOP’s ESG score of 2.22.

Source: RHB Research - 17 Mar 2022