• Maintain BUY, with new MYR3.60 TP (from MYR3.25), 28% upside and c.4% FY25F yield. Sarawak Oil Palms’ 1H24 earnings beat our and Street estimates, accounting for 58-62% of full-year forecasts. As production continues to ramp up and unit costs moderate, we expect the company to chart stronger numbers in 2H24. Its valuation remains attractive at 7.5x FY25F P/E, vs the peer range of 6-10x.

• 2Q24 core earnings improved 11% QoQ (+106% YoY), on the back of higher FFB production (+3% QoQ, +11% YoY), CPO ASP (+6% QoQ, +5% YoY) and lower-than-expected unit costs (-16% QoQ, -18% YoY). These drivers, alongside the higher-than-expected interest income in 1H24 (+17% YoY vs our forecast of -22%) resulted in 1H24 core profit growing 99% YoY.

• 2Q24 FFB output rose 3% QoQ and +11% YoY, bringing 1H24 FFB output growth to +10.6% YoY. YTD-July, FFB growth remained solid at +9% YoY, driven by the peak production cycle. This is above our +7.3% YoY FY24 FFB growth forecast and SOP’s original +5-6% YoY guidance. Management however, remains wary of the weather situation in the northern regions, but we note that these areas make up only 8-10% of the total planted area. Taking this into account, we tweak up our FY24 FFB growth estimates slightly to +8% YoY but maintain our 3-4% growth for FY25F-26F.

• Estimated 2Q24 unit costs have dropped 16% QoQ and 18% YoY, lower than our flattish assumption for FY24-26, thanks to the improvement in output as well as moderation of fertiliser costs (1H24 requirements bought at prices that were 10% lower YoY). We believe SOP has applied 45-50% of its fertiliser requirements in 1H24 and expect fertiliser application to be on track in 2H. As such, we lower our unit cost assumption by 6% for FY24-25 and 7% for FY26.

• Downstream outlook. Although no disclosure was given, management guided that this segment improved QoQ and YoY, and expects it to stay in the black for the rest of the year, driven by its second refinery, which produces higher quality oils (+5% premium), bringing the total downstream capacity to 690k tonnes (+53%). Management however, remains wary of the competition from Indonesian downstream players, given the country’s advantageous tax structure. We expect SOP’s refinery utilisation rate to remain at 75%.

• We raise FY24F-26F earnings by 12%, 14% and 14% after imputing a higher interest income and FFB growth forecast, while expecting unit costs to continue its downward trend in 2H24, on the back of increasing output.

• Our new TP is based on 11x 2025F P/E, with a 14% ESG discount built in. SOP is trading at 7.5x FY25F P/E, at the lower end of its peer range of 6-10x.

Source: RHB Research - 30 Aug 2024