This article first appeared in The Edge Financial Daily on March 3, 2020 - March 9, 2020

Sarawak Oil Palms Bhd
(March 2, RM3.20)
Maintain buy with a higher target price of RM4.45: Sarawak Oil Palms Bhd recorded stellar earnings for the financial year ended Dec 31, 2019 (FY19), at 170% of our and 260% of consensus’ full-year projections.

Its sensitivity to crude palm oil (CPO) prices was a boon to earnings for the fourth quarter ended Dec 31, 2019 (4QFY19), given a 20% quarter-on-quarter (q-o-q) increase in the average selling price (ASP).

The company’s valuations remain reasonable at 14 to 15 times FY20 forecasts price-earnings (PE), versus peers’, trading at PE multiples of 15 to 20 times.  

Sarawak Oil Palms saw a CPO price of RM2,487 per tonne in 4QFY19 or +20% q-o-q, boosting profits significantly given its sensitivity to CPO prices.

We estimate every RM100 per tonne change in the CPO price impacts the company’s net profit by 10% to 15% per annum. Sarawak Oil Palms achieved this despite recording a 10% q-o-q decline in fresh fruit bunch (FFB) output.

Its FFB growth for FY19 was flat at +0.1% year-on-year (y-o-y) attributed to dry weather in Sarawak in the first quarter of 2019 (1Q19) and labour shortage at its estates.

In 2019, Sarawak Oil Palms’ labour shortage at 30% has since been reduced to the current 20% to 25%, and the weather is now normal.

 In 2020, it expects an improved output of 8% to 10% y-o-y, from 3,000ha of new areas coming into maturity and a reduced labour shortage. We project the company’s FFB growth at 7% to 9% for FY20 and FY21.

In 1Q20, Sarawak Oil Palms sold about 10% of its output forward at prices above RM2,700 per tonne. The management has an internal average CPO price target of RM2,600 per tonne for 2020.   

Unit costs were down to around RM1,700 per tonne at year end — from RM1,750 per tonne in the cumulative nine months ended Dec 31, 2019 and RM1,900 per tonne in 2018 — a marked improvement, stemming from the company’s cost cutting throughout the year.

In 2020, the management expects unit costs to lower further to RM1,650 to RM1,600 per tonne on an improved FFB output and a full-year impact of the cost cutting.  

Our earnings forecasts are tweaked upwards by 6% to 13% for FY20 and FY21. We still like Sarawak Oil Palms for its undemanding valuation and decent earnings growth prospects. — RHB Research Institute, March 2