• Maintain BUY, new MYR2.85 TP from MYR3, 13% upside with c.2% FY23F yield. Sarawak Oil Palms’ 1H23 earnings are in line with expectations, and account for 40-41% of our and Street full-year forecasts. We expect it to chart stronger numbers in 2H on the back of better output. This counter is trading at an undemanding FY24F P/E of 7.7x, vs the peer range of 7-11x P/Es.

• 1H23 earnings are in line with expectations, at 40% of our and 41% of Street full-year forecasts. We do expect its performance to pick up in 2H results, on the back of higher output. 1H23 core net profit dropped 71% YoY to MYR100.3m, mainly dragged by lower average palm oil (-39% YoY) and PK prices (-49% YoY).

• Better output season ahead. 2Q23 FFB output decreased by 5.6% YoY (+1.4% QoQ), resulting in 1H23 output dropping by 1.6% YoY. This was below our 3.6% YoY FY23 FFB growth forecast and management's 7-8% YY growth guidance. However, its 7M23 output growth has improved to -0.2% YoY, and we anticipate SOP to record positive YTD growth from August onwards. Hence, we keep our FY23 FFB growth assumptions at this juncture.

• We believe 2Q23 unit costs have increased YoY on the back of higher fertiliser costs as well lower output. SOP likely applied the carried-forward unused high-priced fertilisers from 2022 to 1H23, which pushed operational costs up. We anticipate unit costs to be lower in the 2H to reflect the lower priced fertilisers (-35% YoY) that it has secured on top of higher output. We believe SOP has applied 40-50% of its FY23 fertiliser requirements in 1H23. We make no changes to our cost assumption of MYR2,400 per tonne for FY23, which has factored in the decrease in fertiliser prices.

• Downstream. Although no disclosure was given, management has indicated that the performance from this segment will be weaker YoY due to lower byproduct prices, while volumes are expected to remain flattish. Furthermore, Indonesia’s export tax and levy structure could result in increased competition, as Indonesian downstream players would have the upper hand – given the country’s advantageous tax structure. We understand that SOP’s refinery utilisation rate remains at around 80-90%.

• We trim FY23-25F earnings by 6-7% after imputing lower PK production and higher interest expenses.

• Our lower TP of MYR2.85 is based on 10x 2024F P/E, with a 14% ESG discount built in to account for its ESG score of 2.3. SOP is trading at 7.7x FY24F P/E, which is at the lower end of its peer range of 7-11x.

Source: RHB Securities Research - 28 Aug 2023