Sarawak Plantation saw its 1QFY22 core earnings doubling to RM26.1m, bolstered by stronger CPO prices despite weaker FFB production. Despite the strong results, it made up only 18% of our full-year expectation but in line with market expectation at 27%. The weaker-than-expected results were mainly attributed to a shortfall in FFB production. Nevertheless, we make no changes to our numbers as we expect to see a strong catch-up in the subsequent quarters, led by a strong pick-up in FFB production and higher CPO prices. A first interim dividend of 5sen was declared for the quarter. Maintain our Outperform call with an unchanged TP of RM3.59 based on 13x FY23 EPS.

• 1QFY22 revenue (QoQ: -24.5%, YoY: +26.4%). Lifted by stronger CPO prices, the Group’s plantation sales rose 26.4% YoY to RM184m. During the quarter, FFB production slipped 10% YoY to 62,061mt. Meanwhile, 1QFY22 average realised CPO price rallied from RM3,819/mt to RM5,938/mt, while average realized palm kernel price advanced from RM2,375/mt to RM4,375/mt. First quarter FFB yield slipped from 3.31mt/ha to 3.12mt/ha while oil extraction rate rose from 19.38% to 19.93%.

• 1QFY22 core earnings jumped to RM26m (QoQ: -41%, YoY: +123%). Excluding the change in fair value of biological assets amounting to RM17.6m, the Group’s core earnings surged 123% YoY to RM26.1m, bolstered by stronger plantation margin. 1QFY22 all-in CPO production cost averaged at RM3,200/mt vs 1QFY21’s RM2,200/mt, dragged by lower CPO production, higher fertilizer cost and higher amortization coming from the enhancement area starting this year.
• Outlook guidance. Although 1QFY22 production came in below expectations, management maintains its FFB production growth of 10%. The weaker-than-expected production level was due to i), favourable weather condition, ii) worker shortage and iii) bio-stress in oil palm trees. On the positive side, production has been picking up since March. Harvesting period has been around 1.8 rounds per month or once in every 14 days. During the quarter, enhancement area totaled 1,028ha with only 57ha normalizing. 100ha were replanted and it is planning to replant about 1,500ha in FY22. New mature is expected to increase by 1,500ha with total harvestable area standing at 20k ha. Meanwhile, management expects to see an increase in production cost as fertilizer cost has jumped more than 70% YoY. There was no forward sales for CPO as there is a wide gap between the spot and available forward prices in the market. On the foreign worker shortage issue, the Group is currently experiencing harvester shortage of up to 150 people and it is in the process of submitting application for recruitments from Indonesia. It is worth noting that the hiring is subject to quota by reference to estate hectarage. Meanwhile, fertiliser application was behind schedule as it only completed 50% of the 1Q programme. Lastly, our sensitivity analysis suggests that a RM100/mt increase in CPO price would translate into an additional PBT of RM8m.

Source: PublicInvest Research - 23 May 2022