• Maintain BUY and MYR4.15 TP, 22% upside with c.3% FY24F yield. Sarawak Oil Palm’s 9M24 earnings meet our but beat consensus expectations. We expect earnings to remain robust QoQ, buoyed by higher CPO prices and lower cost, albeit likely offset by lower output. This counter is trading at an attractive FY25F P/E of 7.8x, vs the peer range of 7-11x.

• 9M24 earnings came in within our but beat Street estimates, at 77% of our and 85% of Street full-year forecasts. 3Q24 core profit rose 8% QoQ (+33% YoY), on the back of higher FFB output (+15% QoQ) and lower estimated unit costs (-16% QoQ, -18% YoY), bringing 9M24 core profit to MYR313m (+69% YoY). SOP also declared an interim DPS of 7 sen, bringing YTD DPS to 11 sen, which translates to a c.31% payout ratio.

• SOP recorded a CPO ASP of MYR4,205/tonne in 3Q24 (+1% QoQ, 9% YoY), vs the average MPOB price of MYR3,989/tonne (+5% premium). As SOP mainly sells on spot, we expect the company to continue benefitting from the high CPO price environment, maintaining its premium over MPOB.

• Output to moderate. 3Q24 FFB output rose 15% QoQ (-4% YoY), bringing the 9M24 figure to +5% YoY. In YTD-October, FFB output moderated to +3% YoY, below management’s guidance of +5-6% and our +6.7% assumption. As its production has peaked in September-October, output should gradually moderate in November-December. As such, we cut our FFB growth to +3.4% from +6.7% for FY24F, while keeping FY25-26F growth at +6%.

• Estimated unit costs decreased by 16% QoQ (-18% YoY), bringing 9M24 unit cost down by roughly 5% YoY, in line with management’s guidance of a 3 -6% decline in FY24F. This was mainly driven by higher FFB output as well as lower fertiliser costs (2H24 requirements are at -5% YoY). We understand that SOP is expected to fully apply its fertiliser requirements in FY24. We make no changes to our cost assumptions, for now.

• Downstream outlook. Although no disclosure was given, management guided that this segment remained profitable in 3Q24. SOP continues to expect positive margins in 4Q24, driven by a higher utilisation rate YoY for both refineries. However, given the uptrend in CPO prices and increased competition from Indonesia’s recent change in tax structure, we remain wary of the segment’s performance. As such, we maintain our conservative estimates for both the utilisation rate (75% for FY24-26F) and margin assumption of 2.5-3%.

• Our estimates remain relatively unchanged, after accounting for lower FFB output and interest expense while imputing higher interest income.

• Our TP of MYR2.95 is based on 11x 2025F P/E, with a 14% ESG discount built in to account for its ESG score of 2.3 out of 4. SOP is trading at 7.8x FY25F P/E, which is at the lower end of its peer range of 7-11x.

Source: RHB Securities Research - 29 Nov 2024