• Upgrade to NEUTRAL from Sell, with unchanged MYR3.40 TP, 5% downside plus 1% yield. We consider Southern Acids’ 1QFY20 (Mar) core net profit to be in line with our and consensus forecasts, at 21-29% of FY20 forecasts. Given the correction in share price, we believe valuations are relatively fair at current levels. We continue to expect it will take some time for more value-unlocking exercises to take place, particularly in the current property environment.

• In line. Southern Acids’ 1QFY20 earnings came in at 21-29% of our and consensus’ FY20 forecasts. We deem this to be in line as we expect FFB growth to moderate in the next two quarters, while oleochemical margins could remain relatively weak.

• The oleochemical division remained in the red, with core loss before tax of MYR1.8m (4QFY19: +MYR0.03m). Utilisation rates improved slightly to 86% from 80% in 4QFY19. Ex-EI, the margin for the oleochemical division was -2.7% (from 1.1% in 1Q19) on lower selling prices of fatty acids (-17% YoY) and glycerine (-37% YoY).

• The healthcare division performed in line with expectations, posting a 17% YoY increase in PBT contribution in 1QFY20 on higher revenue/inpatient (+10% YoY).

• Plantations division turned around in 1Q20 from losses in 4QFY19, albeit lower YoY. The plantations division posted a 38% YoY fall in PBT in 1QFY20 despite higher FFB output (+16%). This was due to lower CPO (-13%) and PK prices (-32%).

• We make no changes to our earnings. We believe FFB growth could moderate in the next few quarters, while the oleochemical division could remain relatively weak due to low selling prices.

• Our SOP-based valuation is unchanged at MYR3.40/share, with P/E targets of 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 MYR192m and applied a 25% holding company discount.

• Fair valuations. With the recent price correction, we believe valuations are now relatively fair for Southern Acids. 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 more 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 2019