• BUY, new MYR7.25 TP from MYR7.05, 21% upside with c.3% yield. Sarawak Oil Palms’ 1Q22 results are above expectations, at 35% of our and 48% of Street full-year forecasts. The company’s minimal forward position was a main factor behind its stellar profit, which enabled SOP to benefit from higher CPO spot prices. Its valuation remains attractive – the stock is trading at 7x FY23F P/E, vs its peer range of 7-10x.

• 1Q22 earnings are above expectations, at 35-48% of our and Street FY21 estimates. Core net profit jumped 171% YoY to MYR188m, on higher average palm oil and PK prices of MYR6,308/tonne (+62.4% YoY) and MYR5,128/tonne (+77.5% YoY). This boosted profit significantly, given the company’s sensitivity to any change in CPO prices.

• Another quarter passes, but labour shortages remain. FFB growth for 1Q22 was down 13.7% YoY, and this was significantly below our -0.5% YoY projection and management’s flattish guidance for FY22. In 4M22, this decline has worsened to -14.4% YoY. The main culprit – the labour shortage – remains unresolved (the current level was at 30-35% in 1Q22). SOP intends to partly alleviate this issue by reallocating more workers to high-yield areas, as well as hiring contract workers for maintenance and upkeep work. Management believes this shortage will only be resolved in 2H22F. If this is prolonged up to the start of the peak season, SOP may face another round of under-optimisation of its crops. As such, we revise our FY22-24F growth to -4.9% to 9.6% (from -0.5% to 6%).

• More decent quarters to come for its downstream segment. Although no disclosures were given, we believe downstream margins remained robust, given the rising CPO price environment. We expect better quarters to come, as its downstream expansion is set to be completed in 2H22 – where the focus is on producing higher-quality, tailored refined products for customers.

• We raise our CPO price assumptions per tonne to MYR5,300 (from MYR4,500) for FY22, and to MYR4,300 (from MYR3,600) for FY23, while the FY24F CPO price remains at MYR3,500. As such, FY22-24F earnings are revised by -18% to 26%.

• Our sector Top Pick’s sensitivity to CPO prices (being a purer upstream) player makes it more appealing vs other local planters, while its landbank exposure in Malaysia prevents SOP from being directly affected by the policy uncertainties currently faced by Indonesian peers.

• Reiterate BUY, with a higher TP of MYR7.25 based on 10x 2023F P/E. Its valuation remains inexpensive – this stock is trading at 7x FY23F P/E, at the low end of its peer range of 7-10x. Note that our TP has imputed a 16% ESG discount, to account for SOP’s ESG score of 2.22.

• Key risks include an unfavourable CPO price movement, weather risks, as well as demand and supply dynamics of the vegetable oil industry.

Source: RHB Research - 24 May 2022