Maintain NEUTRAL with lower SOP-based TP of MYR4.15 from MYR4.20, 5% total upside, after rolling forward our valuation period. We believe CPO prices have overreacted negatively to the trade war and expect to see some respite in 4Q18, post seasonal peak. However, given the larger than-expected price reaction, we are cutting our CPO price assumptions for 2018-2019 to MYR2,400-2,500. Our earnings have been cut by 5-9% for FY18F-20F. While we like Southern Acids’ undervalued assets, we continue to highlight the key “value trap” risk as the value-unlocking timeline remains hazy.

Trade war still affecting sentiment. Negative sentiment surrounding the trade war and the recent strength of the MYR have resulted in CPO prices falling to low levels of MYR2,100-2,200/tonne. While we think the negative reaction is overdone, we do not expect much price recovery over the next few months, as we continue to head towards the seasonal peak output period. We expect some price recovery in 4Q18 once the peak production period is over, and once the real impact of the trade war starts to come through. Read more about our views here - Regional Plantation : Expect Some Price Recovery In 4Q18 (4 Jul 2018)

Revising CPO prices. Given the magnitude of the recent CPO price decline, we no longer believe our previous price averages for 2018 and 2019 are achievable. We are therefore cutting our price projections to MYR2,400/tonne for 2018 (from MYR2,550) and to MYR2,500/tonne for 2019 (from MYR2,700). With this cut in price assumptions, our earnings for the stocks under our coverage have been reduced accordingly. We highlight that the price average does not include the impact of export taxes, which will reduce recognised selling prices further.

Risks include significant changes in the crude oil price trend that may result in a reversal of CPO and other vegetable oil prices, weather abnormalities that may result in an oversupply or undersupply of vegetable oils, significant changes in the demand for vegetable oils caused by changes in economic cycles or price dynamics, and further strengthening of the MYR past our projected MYR4/USD for 2018, which would result in lower CPO prices given the inverse relationship.

Forecasts. Post our CPO price revisions, we have cut our earnings forecasts for FY18-20 by 5-9%.

Recommendation and valuation. Our SOP-based valuation is lowered to MYR4.15 after rolling forward our valuation period. Our SOP is based on an unchanged target P/Es of 15x for the plantations division, 12x for the oleochemical wing, and an EV/bed of MYR1.5m for the healthcare business. We have also used RHB’s TP for Paramount Corp (PAR MK, BUY) of MYR2.40 to account for its 4.6% stake in the company, included its latest net cash position of MYR174.3m, and applied a 25% holding company discount. While we like Southern Acids’ undervalued assets, we continue to highlight the key “value trap” risk as the value-unlocking timeline remains hazy.

Source: RHB Securities Research - 2 Aug 2018