• Maintain NEUTRAL, with new MYR3.80 TP from MYR3.40 with c.2% expected total return. We raise our SOP-based TP to take into account the higher valuation targets we accorded for its plantation and oleochemical divisions, in line with the recent upgrade of valuations we applied for the plantation sector at end-Sep 2019. We continue to expect Southern Acids to take some time to execute its value-unlocking exercise, particularly in the current property environment.

• We upgraded the plantation sector to OVERWEIGHT as at end September, as we expect CPO prices to rerate upwards in 4Q19 and continue climbing in 1H20. We expect plantation stocks to also rerate on the back of this price movement, as CPO prices are the leading indicator for plantation companies’ P/Es. As such, we lift our target P/Es for plantation stocks under our coverage by 3-5x to trade at 1SD above their historical averages. We do this as we expect plantation stocks to trade at more inflated valuations in the short term, before their earnings improve.

• We leave our CPO price assumptions unchanged at MYR2,200/tonne for 2019F and MYR2,400/tonne for 2020F.

• The main grounds for our upgrade are:

i. Trade war is still on, with import duties being levied on US soybeans;

ii. A CPO production slowdown is imminent in 2020F, while inventories should normalise by 1Q20F;

iii. Demand should remain strong from China, due to the continuing African swine flu (ASF) epidemic in the country;

iv. The B30 biodiesel mandate in Indonesia will mop up any excess supply from the market in 2020;

v. Crude oil prices will remain at relatively high levels, resulting in a positive CPO-gasoil price gap;

vi. Weather conditions to remain normal.

• Raise TP. In line with the higher valuations we applied for the plantation stocks under our coverage, we also increase our SOP-based valuation for Southern Acids to MYR3.80 after raising our P/E target for the plantation division to 18x (from 14x) and 15x (from 12x) for the oleochemical division, in line with mid-cap plantation peers. We leave our EV/bed valuation of MYR1.5m for the healthcare business.

• Fairly valued. Despite our higher TP, we believe valuation is relatively fair for Southern Acids. While we like its 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 also remains a key obstacle.

Source: RHB Securities Research - 22 Nov 2019