• Maintain BUY, new MYR3.20 TP from MYR2.95, 13% upside with c.3% FY24F yield. Sarawak Oil Palms’ FY23 earnings beat expectations, accounting for 117-128% of our and Street full-year forecasts. In an environment of higher CPO prices, we like SOP for its upstream exposure. SOP is undervalued – it is trading at just 7.5x FY24F P/E (peer range 6-12x).

• FY23 earnings exceeded expectations, at 117% of our and 128% of Street forecasts. The deviation was mainly due to stronger-than-expected palm kernel (PK) prices and volumes and lower-than-expected production costs. 4Q23 core earnings rose 25% QoQ mainly due to lower operating costs, bringing FY23 core net profit to MYR291.6m (-42% YoY). The FY23 earnings decline was due to lower palm oil (-26% YoY) and PK prices (-35% YoY). No 4Q23 dividend was declared, but we expect a 2 sen final DPS, translating to total DPS of 6 sen ie FY23 dividend payout of 18% and 2.4% yield.

• 4Q23 FFB output slipped by 1% QoQ (+6% YoY), resulting in FY23 output rising by 2.7% YoY. This was below our 3.6% YoY FY23 FFB growth forecast and management's 7-8% YoY guidance. In 1M23, output rose by +10.5% YoY, above our initial FY24 +3.5% forecast. Management did not provide FFB production guidance for FY24, but we expect output growth to be better YoY, as labour shortage issues have largely resolved across the industry. We revised our FY24F FFB growth to +6.0% YoY.

• We believe 4Q23 unit costs have decreased QoQ on the back of lower operating costs, due to lower fertiliser application activities in 4Q. Regardless, SOP has managed to apply the amount of fertilisers close to 100% of its FY23 requirement. As it has likely finished applying the high- priced fertilisers in 2023, we anticipate fertiliser prices for 2024 to be 15- 30% lower YoY. We make no changes to our cost assumption of MYR2,000/tonne for FY24, as we imputed the decrease in fertiliser prices already.

• Downstream. Although no disclosure was given, management indicated previously that the YoY weakness of this segment’s performance in FY23 was also seen in that of other Malaysian downstream players. 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 increase FY24-25F earnings by 6-10% after imputing a higher FFB output growth assumption, lower interest expenses, as well as housekeeping changes. We introduce FY26F earnings in this report with a CPO price assumption of MYR3,800 per tonne.

• Our new TP of MYR3.20 is based on 10x 2024F P/E, with a 16% ESG discount built in to account for its ESG score of 2.2 out of 4. SOP is trading at 7.5x FY24F P/E, which is at the lower end of its peer range of 6-12x.

Source: RHB Research - 1 Mar 2024