• Maintain BUY, with new MYR3.30 TP from MYR3.20, 14% upside with c.3% yield. Sarawak Oil Palms’ earnings should be boosted by decent FFB growth and improving downstream utilisation, albeit partially offset by slightly higher CPO unit costs. We believe the stock remains attractive, trading at 7.5x FY24F P/E vs the peer range of 7-10x P/E.

• SOP recorded solid CPO and FFB output growth in YTD-Apr 2024 at +17% QoQ and +12% YoY, higher than our original forecast of c.6% for FY24. Despite the strong start, the company is maintaining its 2024 FFB growth target at 5-6%, as management is still wary of the lingering impact of El Nino in 2H24, particularly in the northern regions as well as its more aggressive replanting targets of 5,000-6,000 ha in 2024 and 2025 (vs 3,500 ha in 2023). We note however, that the northern areas make up only 8-10% of total planted area. Bearing this in mind, we raise our FFB growth assumption for FY24 to 7.3% from c.6%, while FY25F-26F is at a 3-4% growth.

• Costs to gradually decline. SOP’s cost of production for FY23 came in at roughly MYR2,900/tonne (+9% YoY) excluding PK credit. Moving forward, for FY24, management is targeting costs to decline to MYR2,800/tonne (-3% YoY), led by lower fertiliser costs (1H24 requirements bought at prices -10% YoY), and an improvement in output. SOP only applied 70% of its fertiliser requirements in 1Q24, due to some logistic timing issues. As such, given the catch up in manuring activities in the coming quarters, we raise our CPO unit costs slightly by 2% to MYR2,830/tonne, in line with management guidance for FY24F while expecting flattish growth for FY25F-26F.

• Downstream segment should improve in FY24F. SOP’s new multi-feed higher quality oil refinery with capacity of 240k pa was officially launched at end-1Q24, but has been running since 2023. With this, the company’s total downstream capacity has risen by 53% to 690k tonnes. The second plant produces higher quality oils, which are marketed at a slight premium to normal products of around +5%. SOP is targeting to achieve a utilisation rate of 80-85% for the refineries in FY24F from 65-70% in FY23. Given the higher-than-expected utilisation rate in FY23, we raise our utilisation rate for FY24F-26F to 75% (from 50%). On the margin front, SOP managed to stay in the black in FY23 and expects to remain profitable in FY24F, due to its better product mix and new marketing strategy.

• We increase FY24F-26F earnings by 2-3% after imputing higher FFB growth and downstream utilisation rate, offset by slightly higher CPO unit costs.

• Our higher TP of MYR3.30 is based on an unchanged 10x 2024F P/E, with a 16% ESG discount, taking into account the ESG score of 2.2. SOP is trading at 7.5x FY24F P/E, which is at the low end of its peer range of 7-10x.

Source: RHB Research - 20 May 2024