Maintain NEUTRAL with a new MYR3.75 TP from MYR4.15, total expected return: -7.1%. We believe it will take some time for any value-unlocking exercise to take place, particularly in the current lacklustre property environment. The key catalyst remains the timing of such value unlocking. Southern Acids’ 1QFY19 core net profit was below our and consensus forecasts. The oleochemical division swung deeper into the red on lower sales volumes and margins, while the healthcare and plantations wings performed in line with expectations.

Southern Acids’ 1QFY19 (Mar) net profit was below our and consensus expectations. Core earnings reversed into the red at -MYR0.1m vs our net profit of MYR39m for FY19.

The oleochemical division went deeper in the red, with core loss before tax of MYR6m (4QFY18: -MYR0.3m, 1QFY18: MYR4.2m). This was as utilisation rates fell further to 86% from 91% in 4Q18 and 1Q18. Ex-EI margins for the oleochemical division reversed to -7.9% in 1QFY19 (1QFY18: 4.3%, 4QFY18: -0.01%) on lower sales volumes (-16% YoY) and selling prices of fatty acids (-13% YoY).

The healthcare division performed in line with expectations, posting a 5% YoY increase in PBT contributions in 1QFY19 on higher revenue/inpatient (+10% YoY).

Higher FFB output and external FFB available for milling. The plantations division posted a 37% YoY rise in PBT in 1QFY19 on higher FFB processed (+38% YoY). This was offset by lower CPO (-15%) and PK prices (-11%).

We cut our FY19-20 forecasts 13-14% after cutting down our margins for the oleochemical business to 1-2% from 2-3% previously.

Our SOP-based valuation is lowered to MYR3.75 from MYR4.15 based on an unchanged target P/Es of 15x 2019 for the plantations division and 12x for the oleochemical wing, as well as an EV/bed of MYR1.5m for the healthcare business. We have also used RHB’s TP for Paramount Corp (PAR MK, BUY, TP: MYR2.40) to account for its 4.6% stake in the company, included its latest net cash position of MYR174.2m, and applied a 25% holding company discount.

Maintain NEUTRAL. While we like Southern Acids’ undervalued assets, we continue to highlight the key “value trap” risk, as the value-unlocking timeline remains hazy. We do not believe the company Acids will make some moves to unlock value on its assets anytime soon, as management remains extremely conservative and does not seem to be in any hurry. The current lacklustre property market remains a key obstacle.

Source: RHB Securities Research - 29 Aug 2018