Stripping out gain on fair value of biological assets of RM10.9m and PPE writeoff amounting to RM0.3m, Sarawak Plantation registered core earnings of RM8.6m for 1QFY24, down 18.9% YoY. The weaker results made up only 11.4% and 13.9% of our and the street full-year expectations, respectively. The weaker-than-expected results were attributed to a shortfall in FFB production. Despite the weaker-than-expected results, we keep our earnings forecasts as we expect to see a strong catch-up in the subsequent months, led by higher FFB production and lower cost of production. Maintain Outperform call with a new TP of RM2.74 after rolling over our valuations to FY25. A first DPS of 5sen was declared for the quarter.

• 1QFY24 revenue (QoQ: -20%, YoY: +14.3%). The group’s sales rose 14.3% YoY RM127.3m, as weaker CPO prices were offset by improved FFB production. 1QFY24 FFB production rose 10% YoY to 69,671mt while third party purchase production rose 26% YoY to 75,919mt. 1QFY24 average realised CPO price contracted from RM3,942/mt to RM3,898/mt while average realized palm kernel price advanced from RM1,927/mt to RM2,062/mt. 1QFY24 FFB yield stood at 3.31mt/ha while OER slipped from 20.11% to 19.77%, dragged by shorter working month in Feb.

• 1QFY24 core earnings fell from RM10.6m to RM8.6mm. Excluding the gain on fair value of biological assets (RM10.9m), the group’s core earnings dropped from RM10.6m to RM8.6m, mainly dampened by deferred tax amounting to RM2.8m and higher distribution and administrative expenses. 1QFY24 all-in CPO production cost inclusive of depreciation and PK credit (excluding distribution cost, which consists of windfall tax, logistics and state sales tax of RM300) softened marginally from 1QFY23’s RM3,110/mt to RM3,100/mt (all-in cash cost: RM2,500/mt), attributed to a i) sharp decline in fertilizer costs, ii) a drop in manuring and milling costs as well as iii) lower administrative costs.

• Outlook guidance. Despite a shortfall of 7% in the 1QFY24, management retains its FFB production target of 400k mt for 2024, an increase of 25% YoY, lifted by additional mature area of 1,600ha this year. It plans to replant 4,000ha, which requires about 600k seedlings (150 trees/ha). Its nursery has about 900k seedlings with 200k seedlings above 12 months old. Harvestable area currently stands at 21,000ha. It also successfully recovered 20ha encumbered area in 1Q2024 with the remaining 2,163ha to be recovered over the next 4 years. It managed to rehabilitate 200ha enhancement area with an outstanding of 200ha. Management has set a FFB yield target of 18.7mt/ha with CPO price forecast of RM4,200/mt. On the production cost outlook, it expects to see a lower cost of RM2,650/mt (cash cost: RM1,900/mt) due to an increase in FFB yield and softer fertilizer costs. Fertiliser application reached 80% in Round 1 with fertilizer costs (MOP and compound) dropping 6%-7% in Round 2. Lastly, it has allocated capex of RM76m for 2024 with RM52m on replanting & maintenance and remaining RM24m for mill improvement and facilities.

Source: PublicInvest Research - 23 May 2024