• Maintain SELL, with new MYR3.40 TP, from MYR3.45, 10% downside and 1.3% yield. Southern Acids’ FY19 core net profit was below our and consensus forecasts. We believe valuations are unjustified at current levels, with FY20 P/E at 33x. 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.

• Below our and consensus. Southern Acids’ FY19 (Mar) earnings came in at 81% of our and 74% of consensus’ FY19 forecasts. The main discrepancies came from losses incurred at its oleochemical and plantation divisions in 4Q19 due to lower selling prices and a non-recoverable indirect tax from prior years, recorded in the plantations division.

• The oleochemical division remained in the red, with core loss before tax of MYR8.7m (FY18: +MYR8.3m) as utilisation rates fell further to 83% from 94% in FY18. Ex-EI the margin for the oleochemical division was -3% (from 2.2% in FY18) on lower sales volumes (-12.7% YoY) and lower selling prices of fatty acids (-14.1% YoY).

• The healthcare division performed in line with expectations, posting a 3% YoY increase in PBT contributions in FY19 on higher revenue/inpatient (+1.9% YoY).

• Losses in plantation division in 4Q19. The plantations division posted a 20% YoY fall in PBT in FY19 despite higher FFB output (+18%). This was due to lower CPO (-5%) and PK prices (-31%) and the aforementioned indirect tax.

• We lower our FY20F earnings by 6-11% after lowering our PK price assumptions and reducing our oleochemical division margins. We introduce FY21 earnings.

• Our SOP-based valuation is nudged down slightly to MYR3.40/share, from MYR3.45, after rolling forward our valuation period. Our P/E targets are 14x 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 MYR199.5m and applied a 25% holding company discount.

• Stretched valuations. We believe valuations remain stretched for Southern Acids, at 33.2x FY20, maintain SELL. 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 - 29 May 2019