• Maintain BUY and MYR3.30 TP, 12% upside with c.3% FY24F yield. Sarawak Oil Palms’ 1Q24 earnings beat expectations, accounting for 28-34% of our and Street full-year forecasts. We continue to favour SOP for its upstream exposure, while valuations remain inexpensive – the stock is trading at 7.7x FY24F P/E, vs the peer range of 7-10x.

• 1Q24 core earnings exceeded expectations, at 28% and 34% of our and Street FY24 forecasts, and pointed to an outstanding surge of 90% YoY. The deviation was mainly due to the better-than-expected FFB growth (+10% YoY) and lower-than-expected unit costs.

• 1Q24 FFB output fell 18% QoQ but rose +10% YoY. This is above our +7.3% YoY FY24 FFB growth forecast and management’s +5-6% YoY guidance. Over YTD-April, FFB growth strengthened further to +12% YoY. Despite this, SOP is still maintaining its 2024F FFB growth target, as management is still wary of the lingering impact of El Nino in 2H24, as well as its more aggressive replanting targets of 5,000-6,000ha for 2024 and 2025 (vs 3,500ha in 2023). We maintain our FFB growth estimates at +7.3% YoY for FY24, and 3-4% for FY25-26F.

• Estimated 1Q24 unit costs have decreased slightly QoQ and c.8% YoY, on the back of lower fertiliser application activities in 1Q and the moderation of fertiliser costs (1H24 requirements bought at prices that were 10% lower YoY). Note that SOP only managed to apply 70% of its fertiliser requirements in 1Q24, due to some logistic timing issues. We make no changes to our cost assumption of MYR2,830/tonne for FY24, as we have factored in the decrease in fertiliser prices and more aggressive fertiliser application in the quarters ahead.

• Downstream segment’s 1Q24 performance improved QoQ. Although no disclosure was given, management guided that this segment improved QoQ, and expects it to stay in the black for the rest of the year. This is driven by its second refinery, which produces higher-quality oils (+5% premium), which has increased total downstream capacity by 53% to 690k tonnes.

• We make no changes to our FY24-FY26F earnings as we expect unit costs to gradually increase in the coming quarters, on the back of more aggressive manuring activities and the moderation of the CPO price.

• Our unchanged TP of MYR3.30 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 7.7x FY24F P/E, which is at the lower end of its peer range of 7-10x.

Source: RHB Research - 24 May 2024