• BUY, new MYR7.05 TP from MYR6.05, 9% upside with c.2% FY22F yield. As CPO prices remain high in 1Q22, with Malaysian Palm Oil Board (MPOB) spot prices averaging at MYR6,183/tonne, Sarawak Oil Palms should post another quarter of solid earnings – given its position as a pure Malaysian planter with minimal forward sales. Its valuation remains inexpensive – this stock is trading at 7x FY22F P/E, vs peers’ 7-10x.

• March FFB production grew MoM (+14.7%) from better weather. However, YTD FFB output dropped by 13.7% YoY. We expect this low FFB output trend to continue, at least until end-1H22, given the labour shortage plaguing the sector. We expect FFB to dip 0.5% YoY this year, then grow by 6% YoY in FY23 vs SOP’s flat growth guidance for FY22.

• Foreign worker recruitment process remains slow. There have been delays in recruiting foreign workers nationwide, due to the streamlining of permit applications through the Foreign Workers Centralised Management System (FWCMS) portal. Of the 475,678 employers that had submitted applications to recruit foreign workers through the system up to 1 Apr, 53,854 or 11.3% of them are for the plantation sector. Note that the 32,000 workers previously approved solely for the plantation sector have yet to arrive. We understand that SOP has started hiring contract workers to alleviate its labour shortage (currently at 30-35%) but the impact is rather insignificant so far. If this situation is prolonged until 2H22 when the peak season starts, SOP might have to bear another round of under- optimisation of crops due to the lack of workers on the harvesting side.

• Strong 1Q22 earnings expected. We anticipate SOP to record another good set of results for 1Q22, given the current high-priced environment for CPO. As MPOB spot prices averaged at MYR6,183/tonne (vs MYR5,171/tonne in 4Q21), SOP’s position as a pure Malaysian planter with minimal forward sales would benefit from the high prices. However, this would slightly be offset by its lower FFB output. All in, we believe 1Q22 earnings would be 15-20% higher QoQ.

• Unit costs to rise 10-15% YoY in FY22, on higher fertiliser costs. Its unutilised fertiliser from FY21 can be carried forward to 1H22, which should cut down fertiliser costs for the period. Together with the lower- priced unutilised 2021 fertiliser, SOP’s 1H22 fertiliser costs are expected to rise 50% YoY.

• SOP has proposed a 1-for-2 bonus issue of up to approximately 303m shares. We believe this exercise will increase its share trading liquidity. However, the entitlement date has yet to be announced.

• We lift FY22-24F earnings by 1.8-3.6% and ascribe 9x P/E (from 8x) to FY22F earnings, in line with its peers that we cover. SOP is trading at a cheap 7x FY22F P/E – at the low end of its peer range of 7-10x. Note that our TP also includes a 16% ESG discount imputed, to account for the company’s ESG score of 2.22. Key downside risks: A decline in CPO prices, weather risks, and lower-than-expected FFB production output.

Source: RHB Research - 27 Apr 2022