• Maintain BUY, new MYR2.95 TP from MYR2.80, 14% upside with c.3%FY24F yield. Sarawak Oil Palms’ 9M23 earnings beat expectations,accounting for 79% of our and Street full-year forecasts. As its output isexpected to remain stronger due to seasonal factors, we expect SOP tochart higher numbers in 4Q relative to its 1Q and 2Q performance. Thiscounter is trading at an undemanding FY24F P/E of 7.4x, vs the peer rangeof 6-11x P/Es.

• 9M23 earnings exceeded expectations, at 79% of our and Street full-yearforecasts. The deviation was mainly due to stronger-than-expected palmkernel (PK) prices and sales volumes. 3Q23 core earnings rose 67% QoQon higher FFB output (+33% QoQ), bringing 9M23 core net profit toMYR185.5m (-59% YoY). The YTD earnings drop was due to lower averagepalm oil (-31% YoY) and PK prices (-42% YoY). As SOP declared an interimDPS of 4 sen, we anticipate one final DPS of 2 sen for FY23, which the totalof 6 sen translates to a 21% payout ratio or 2% yield.

• Output to remain seasonally robust. 3Q23 FFB output rose 33% QoQ(+6% YoY), resulting in 9M23 output rising by 1.3% YoY. This was belowour 3.6% YoY FY23 FFB growth forecast and management's 7-8% YYgrowth guidance. Its output has further improved in 10M23, rising by +2.4%YoY, and is on track to meet our +3.6% growth forecast. Hence, we keepour FY23 FFB growth assumptions at this juncture. However, we increaseour PK production forecasts to reflect its 35% QoQ increase in output in 3Q.

• We believe 3Q23 unit costs have decreased QoQ on the back of higheroutput as well as lower fertiliser costs, assuming there was no ramp-up offertiliser application in 3Q. SOP has likely finished applying the unutilisedhigh-priced fertilisers from 2022 in 1H23, resulting in its recently tenderedfertilisers (with prices down 35% YoY) being applied in 2H23. We make nochanges to our cost assumption of MYR2,400 per tonne for FY23, whichhas factored in the decrease in fertiliser prices.

• Downstream. Although no disclosure was given, management indicatedpreviously the potential YoY weakness of this segment’s performance. Thisis attributed to the decrease in byproduct prices, but volumes areanticipated to stay relatively stable. Furthermore, Indonesia’s export tax andlevy structure could result in increased competition, as Indonesiandownstream players would have the upper hand – given the country’sadvantageous tax structure. We understand that SOP’s refinery utilisationrate remains at around 80-90%.

• We increase FY23-25F earnings by 1-6% after imputing assumptions ofhigher PK production, and lower interest expense and share of its JV profits.

• Our higher TP of MYR2.95 is based on 10x 2024F P/E, with a 16% ESGdiscount built in to account for its ESG score of 2.2 out of 4. SOP is tradingat 7.4x FY24F P/E, which is at the lower end of its peer range of 6-11x.

Source: RHB Securities Research - 30 Nov 2023