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Maintain BUY and MYR3.00 TP, 15% upside and c.4% FY23F yield. Sarawak Oil Palms’ 9M22 results were in line with our, but exceeded Street expectations, at 77% and 90% of full-year forecasts. We believe the company remains attractively valued, currently trading at 6x FY23F P/E, at the low end of its peer range of 6-8x.
SOP posted 9M22 core earnings of MYR451.5m, which was in line with our, but exceeded consensus expectations, at 77-90% of full year forecasts. Core net profit jumped 60% YoY, on higher average palm oil and PK prices of MYR5,656/tonne (+33% YoY) and MYR3,968/tonne (+34% YoY).
Production uptick seen in 3Q22 as FFB output rose 18.6% QoQ and 3.8% YoY, but 9M22 FFB declined 6.8% YoY. This has since improved to -5.5% in 10M22. This was below our -4.9% YoY projection and management’s guidance of -4% for FY22. Labour shortage has not improved much, remaining at 30-35% levels. While management initially guided that labour issue would be resolved by end-2H22, progress has been slow as the timing of new worker influx remains uncertain. Management continues to guide for a 4% drop in FFB output for FY22F while we keep our -4.9% assumptions. However, we cut our PK output growth forecast to -3% (from +3% YoY) given the lower-than-expected production.
9M22 unit cost per tonne rose 67% YoY to MYR2,500, likely on the back of higher fertiliser costs (ranging from 100-150% YoY) and lower PK credits. Management anticipates that the unit production cost would remain around this level until year-end. Given the shortage of manpower, SOP only managed to complete 60-65% of its FY22 fertiliser application as of end-September and only expects to be able to fulfil 70% of the requirement by year-end. Management has yet to tender for its FY23 fertiliser requirements and would only do so towards year-end. We maintain our FY22F-24F unit cost at this juncture.
Weaker quarter for downstream segment. Although no disclosure was made, we believe the downstream segment remained positive in 3Q22 YoY given the 80-90% utilisation, albeit, recorded a lower performance QoQ considering the falling price environment. We remain optimistic on this segment, as SOP’s additional 800 tonnes/day refinery expansion should improve its margins in FY23F, given its focus on producing higher- quality, tailored refined products for customers.
We lower our FY22F earnings by 6% as we anticipate 4Q earnings will be slightly weaker considering the relatively lower prevailing CPO prices while FY23F-24F earnings are maintained.
Reiterate BUY, with a TP of MYR3.00, based on 8x 2023F P/E. Its valuation remains inexpensive – the stock is trading at 6x FY23F P/E, at the low end of its peer range of 6-8x. Note that our TP has imputed a 14% ESG discount, to account for SOP’s ESG score of 2.3.
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