• Keep BUY and MYR3.60 TP, 15% upside and c.3% FY25F yield. Post- meeting with Sarawak Oil Palms’ management, we remain upbeat on its earnings prospects for FY24F-26F, backed by its solid FFB growth and lower production cost, albeit offset by lower margins from the downstream segment. Although YTD-2024 share price has rallied by 21%, the counter is still trading at an attractive 8.3x FY25F P/E vs the peer range of 6-10x.

• SOP recorded solid YTD-August FFB growth at +8% YoY, in line with our assumptions, thanks to its relatively young age profile. Although Miri saw heavy rains over the past month, management gave its reassurance that it has normalised and has minimal impact on productivity. Despite this, SOP is maintaining its FY24 FFB growth target at 5-6%, as peak production (September/October) is coming in slightly lower than expected, and it is anticipating growth to slightly moderate. As such, we cut our FFB production growth slightly to +7% YoY for FY24F (from +8%) but increase our FFB growth for FY25F-26F to 6% and 6% from 4% and 3%.

• Lower costs, higher profits. CPO cost of production for 1H24 came in at roughly MYR2,000/tonne including PK credit vs 1H23 at MYR2,050/tonne (-3% YoY). For FY24, management anticipates costs to decline 3-6% YoY, led by lower fertiliser costs (2H24 requirements at -5% YoY) and higher-than- average output. We keep our cost expectations for FY24 (-7% lower YoY) but adjust FY25F-26F by -3% vs our initial flattish assumptions to reflect the solid production growth. Note that SOP has applied 85% of 1H24 requirements and expects to remain on track in 2H24.

• Competition in the downstream segment likely to intensify. Although no disclosure on contributions, SOP guided that the downstream segment improved QoQ in 2Q24 to positive levels (1Q24 refining margins: slightly negative) thanks to more favourable pricing mix and higher trading contribution. Despite challenges from India’s import tax hike on refined products (from 12.5% to 32.5% effective 14 Sep), management remains hopeful for a similar outlook in 2H24, driven by higher utilisation from both refineries (2Q24: 85% vs FY23: 70%) and better product mix. However, given the recent restructuring of tax policy in Indonesia, which widens the edge downstream players have over Malaysians players, we believe competition may intensify in 2H24. As such, we keep our utilisation rate assumptions at 75% for FY24F-26F to be conservative but lower the margin assumptions to 2.5%, 3% and 3% from 3.5%.

• We trim our FY24 earnings by 6% but raise FY25F-26F earnings by 1% and 4% after adjusting for FFB production growth, production cost and downstream margins. We maintain our TP of MYR3.60, based on 11x FY25F P/E while we reiterate the attractive valuation, at 8.3x FY25F P/E, which is at the mid-range of its peers’ 6-10x. Our TP also includes a 14% ESG discount.

Source: RHB Research - 8 Oct 2024