• Maintain BUY, new TP of MYR4.65 from MYR7.25, c.72% upside with c.6% FY22F yield. With its share price having retreated, its valuation is now irresistibly low – the stock is trading at 4x FY23F P/E, way below its small-cap peer range of 6-11x, while dividend yields are attractive. We have also reduced its ESG discount to 14% (from 16%), as we see good progress on the ESG front.

• CPO prices have plunged on the back of the unwinding impact of Indonesia’s export ban, as well as fears of recession, which brought down commodity prices in general. We believe the price decline could have been slightly overdone, having fallen 44% in seven weeks – much more than the declines in soybean (-31%), crude oil (-17%) and wheat (-16%). While regulatory risks are still present – particularly for Indonesian plantations – supply concerns will continue to plague the sector for the remainder of this year, given the logistics backlog in Indonesia and shortage of labour in Malaysia. That said, if these issues are resolved by end-2022, and if Ukraine is able to export its oilseed products as per the grains deal agreement signed, 2023 will still be a better year for supply, and prices should remain under pressure.

• ESG concerns remain but seem to have taken a back seat. However, the ESG discounts we had previously assigned to valuations are still prevalent. We have reassessed our ESG scores by relooking at the progress made by the industry, identifying shortcomings and any room for improvement. From our analysis, we highlight that, while better disclosure on ESG-related information has been made over the years, progress in mitigating such issues is rather slow. As a result, we upgrade the ESG scores for some companies that have made progress – but also note that some remain relatively stagnant in their ESG efforts, and others have even reduced disclosures.

• CPO price assumptions revised down. We still expect stock levels to remain tight for the next 2-3 months, possibly until end-3Q, thereby providing support to CPO prices. We cut our 2022F CPO price to MYR5,100/tonne (from MYR5,300/tonne). For 2023, as fundamentals continue to improve – assuming labour shortages are somewhat resolved and the Ukrainian oilseed output is able to be exported, CPO prices could decrease further. However, support from higher biodiesel mandates and discretionary biodiesel demand coming back will keep CPO prices above MYR3,000/tonne in the medium term. We cut our 2023F price to MYR3,900/tonne (from MYR4,300/tonne), but maintain our 2024F estimate at MYR3,500/tonne. As a result, we cut SOP’s FY22-24F earnings by 1-20%.

• Keep BUY, new TP of MYR4.65 (from MYR7.25) based on a FY23F P/E of 8x. A 14% ESG discount is ascribed to the TP based on its upgraded ESG score of 2.3 (from 2.2), given its improvements made in recent years in relation to ESG.

Source: RHB Research - 11 Aug 2022