• Downgrade to SELL from Neutral, with new MYR3.45 TP, from MYR3.35, 11% downside and 1.3% yield. Southern Acids’ 9MFY19 core net profit was in line with our but below consensus forecasts. We believe valuations are unjustified at current levels, with FY19 P/E at 30x and FY20 P/E at 22x. It will take some time for any value-unlocking exercise to take place, particularly in the current property environment. A key catalyst remains the timing of such value unlocking.

• In line with our but below consensus. Southern Acids’ 9M19 earnings came in at 77% of our and 64% of consensus’ FY19 forecasts.

• The oleochemical division remained in the red, with core loss before tax of MYR8.7m (9MFY18: MYR8.3m) as utilisation rates fell further to 84% from 95% in 9M18. Ex-EI the margin for the oleochemical division was -3.9% (from 2.9% in 9MFY18) on lower sales volumes (-12.3% YoY) and lower selling prices of fatty acids (-12.8% YoY).

• The healthcare division performed slightly better than expectations, posting a 14% YoY increase in PBT contributions in 9MFY19 on higher revenue/inpatient (+3.5% YoY).

• Higher FFB output. The plantations division posted a 9% YoY rise in PBT in 9MFY19 on higher FFB output (+26%). This was offset by lower CPO (-22%) and PK prices (-30%).

• We raise our FY19F-20F earnings by 5-7% after raising our healthcare division margins slightly.

• Our SOP-based valuation is nudged up to MYR3.45/share, from MYR3.35 based on am unchanged P/E target of 16x 2019F for the plantations division and 12x for the oleochemical wing, as well as an EV/bed of MYR1.5m for the healthcare business. We apply RHB’s TP for Paramount Corp (PAR MK, BUY, TP: MYR2.56) to account for its 4.6% stake in the company, included its latest net cash position of MYR188.4m and applied a 15% holding company discount (Figure 4).

• Stretched valuations. Given the recent run up in share price (+5% YTD), we believe valuations are starting to look a bit stretched for Southern Acids, at close to 30x FY19 and 22x FY20. We downgrade to SELL, from Neutral. While we continue to 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 will make any 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 - 28 Feb 2019