• Maintain BUY, with a new MYR3.00 TP from MYR3.10, 18% upside and c.6% yield. Labour shortage is the bane of Sarawak Oil Palm’s existence, causing FFB to decline 9% in YTD-August. However, earnings remain robust, given its mainly spot selling policy. We believe share price has been unfairly punished, as SOP is currently trading at 5.8x FY22F P/E, vs peers’ 6-11x.

• FFB output improved MoM for the past few months, with July and August production up 1.2% and 6% MoM. However, YTD-Aug output is still at -9.0% (albeit an improvement from 7MFY22’s -10.2% YoY). Management is guiding for -4% YoY FFB growth for FY22 in anticipation of the peak season in 4Q. We keep our 5% YoY FFB decline for FY22F.

• Labour shortage stabilised. While Malaysian palm oil companies are expecting to gradually receive foreign workers from September/October onwards, SOP is still unclear as to the timing of new worker influx for Sarawak. Its labour shortage of 30% has stabilised over the past few months, and SOP hopes for a reduction towards 20% by year-end.

• Minimal forward sales in 2H22 and SOP continues to sell on spot. Management expects CPO prices to continue at MYR4,000-4,500/tonne given the tight labour situation.

• 2Q22 unit cost jumped 37% QoQ to MYR2,600/tonne, on the back of higher fertiliser costs (ranging from +50% to +150% YoY). As it only completed 75% of its fertiliser application in 2021, the unused fertiliser was applied in 1Q22 while higher-priced fertiliser was used in 2Q22. SOP anticipates 2H22 unit cost to moderate to MYR2,400-2,500 due to better FFB output. Given the shortage of labour, SOP expects it would only manage to apply 70% of full-year fertiliser requirements. As of end-June, it applied 40% of full-year requirements. SOP has yet to tender for fertiliser requirements in FY23 and would only do so towards year-end. We increase our FY22-23F unit cost by 1.3-1.4%.

• Downstream segment remained profitable on the back of robust refinery margins and stronger biodiesel demand. In 2H22 margins may moderate due to the impact of the recent decline in ASPs of refined products, given SOP’s higher-priced feedstock inventory of c.1-2 months. Going into FY23, full-year contributions from the recently completed refinery expansion (of 800t/day slated to be operational by end-month) should help improve margins as SOP intends to produce higher quality tailored products. Refinery utilisation was 80% in 2Q22 (vs 90% in 1Q22), due to maintenance works, while biodiesel utilisation was 60% (vs 50% 1Q22) due to a temporary higher demand in retail biodiesel.

• We trim FY22-24F earnings by 1.8-3.9% to account for higher production costs due to rising fertiliser prices and higher depreciation.

• Reiterate BUY, with a slightly lower TP of MY3.00 (from MYR3.10) based on an unchanged 8x 2023F P/E. Our TP has imputed a 14% ESG discount to account for SOP’s ESG score of 2.3.

Source: RHB Research - 12 Sep 2022