• BUY, new MYR3.10 TP (ex-bonus issue) from MYR4.65, 13% upside with c.6% FY22F yield. Sarawak Oil Palms’ 1H22 results are in line with our but exceeded Street expectations, at 59% and 78% of full-year forecasts. The company’s minimal forward position was a main factor behind its stellar profit, which enabled it to benefit from higher CPO spot prices. Its valuation remains attractive – the stock is trading at 6x FY23F P/E, vs its peer range of 6-11x.

• Despite 1H22 earnings making up 59% of our FY22F forecasts, we deem it in line, as we expect earnings to weaken HoH in 2H22 due to the prevailing lower CPO prices. Core net profit jumped 109% YoY to MYR351m, on higher average palm oil and PK prices of MYR6,389/tonne (+54.0% YoY) and MYR4,560/tonne (+52.1% YoY). SOP declared its first interim dividend of 4 sen per share. (1H21: nil).

• Labour shortages hampered growth. 2Q22 FFB output dropped 11.3% YoY, bringing down 1H22 FFB growth by 12.4% YoY. This was below our -4.9% YoY projection and management’s flattish guidance for FY22. In 7M22, this decline moderated to -10.2% YoY. Management has revised its growth guidance now to -4% YoY for FY22F. The main culprit – the labour shortage – has not improved much, and remains at 30-35% levels. SOP partly alleviates this issue by reallocating more workers to high-yield areas, as well as hiring contract workers for maintenance and upkeep work. Management believes this shortage will only be resolved by end- 2H22. However, if this is prolonged and the influx of workers gets delayed, the company may again not be able to fully benefit from the peak season. That said, we make no changes to our FFB growth, on the assumption that output will pick up in 2H.

• Challenging quarters ahead for downstream segment. Although no disclosures were given, we believe downstream margins remained stable, given the high utilisation at around 80%. However, margin compression may be likely in an environment of falling prices, given the higher cost of feedstock bought (this is processed 1-2 months later, at lower prices). We remain optimistic on this segment, as SOP’s downstream expansion is set to be completed in 2H22 – where the focus is on producing higher-quality, tailored refined products for customers.

• We make no changes to our earnings forecasts despite the strong 1H results, as we believe 2H earnings will be weaker, considering the relatively lower prevailing CPO prices. However, we raise FY23-24F earnings slightly to account for higher interest income rate.

• Reiterate BUY, with a lower TP of MYR3.10 (from MYR4.65) to account for the recently completed 1-for-2 bonus issue, based on 8x 2023F P/E. Its valuation remains inexpensive – this stock is trading at 6x FY23F P/E, at the low end of its peer range of 6-11x. Note that our TP has imputed a 14% ESG discount, to account for SOP’s ESG score of 2.3.

• Key risks include an unfavourable CPO price movement, weather risks, as well as demand and supply dynamics of the vegetable oil industry.

Source: RHB Research - 29 Aug 2022