• Maintain NEUTRAL and MYR3.80 TP, 3% expected total return. Post meeting with management, we believe earnings prospects are improving for its plantations and healthcare divisions. However, we continue to expect Southern Acids to take some time to execute its value-unlocking exercise, particularly in the current property environment.

• Oleochemicals to remain in the red. We expect the oleochemical division to remain in the red for the rest of the FY20 (Mar) on the back of lower selling prices of fatty acids and glycerine. Selling prices of fatty acids, which makes up 90% of its sales volumes, are down 15% YoY due to industry oversupply. Glycerine prices are down by 36% YoY in 1HFY20, due to the ramp-up of biodiesel production in the country, which has resulted in more glycerine (by product) being produced. Despite the rising CPO price environment, there is a 3-6 month time lag before the price improvement flows down to the downstream sector. We expect this division to only breakeven in FY21.

• Hospitals provide stable base. The hospital division remains a stable earnings driver, with 1HFY20 PBT up 16% YoY, coming from rising number of both inpatients and outpatients and improving revenue per inpatient. With the recent commissioning (November) of its new Tomotherapy machine (an advanced cancer treatment machine), management expects to see more inflow of patients to its cancer centre. It is also in the midst of renovating and refurbishing the hospital gradually, which should add value to its offering.

• Plantations prospects improving. The plantations division saw a marked improvement in earnings in 2Q20 (PBT +>300%) due to a significant increase in FFB and CPO output. This came on the back of 975 ha, which came into maturity this FY, as well as improvements in weather in its Indonesian estates. Going forward, management has approved planting up of 1000 ha of plasma land, which is likely to occur over the next few years. We expect this division to see continued earnings improvements on the back of higher CPO prices going forward.

• No change to earnings and TP. We maintain our earnings and SOP-based valuation of MYR3.80, based on an unchanged 18x P/E target for the plantations division and 15x 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. We continue to 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 - 18 Dec 2019