MARKET DEVELOPMENT
Strong Outlook Ahead for Sarawak Oil Palms
Strong Outlook Ahead for Sarawak Oil Palms
22/06/2013 (Borneo Post) - As the industry continues to be plagued by depressed crude palm oil (CPO) prices, analysts believe there might be distressed assets coming up for grabs soon which will benefit Sarawak Oil Palms Bhd (Sarawak Oil Palm).
According to RHB Research Institute Sdn Bhd (RHB Research) analyst Gan Jian Bo in a report on the group said with its strong balance sheet, Sarawak Oil Palms has the ‘financial muscle’ to snap up good deals in Sarawak when such opportunities surface.
“The asking prices for planted land have fallen from the days when CPO prices were above RM3,000 per tonne a year earlier,” noted Gan, adding that, “Should CPO prices remain depressed, we think some smallholders with young areas will suffer from cash flow problems and may be forced into selling at distressed prices.
“While the group is not actively looking for new areas, it is willing to issue up to RM600 million to RM800 million in bonds to fund a large acquisition should a good deal emerge, although it would only be keen if the asking price is below RM45,000 per hectare (ha).
“However, such debt financing will enlarge SOP’s net gearing from 0.30 times to 0.81 times to 0.98 times.” Meanwhile, with its fast-growing CPO production, the analyst believed that Sarawak Oil Palms output was capable of outpacing its 450,000 tonne per annum refinery capacity over the next two years.
“It has plans to double its existing capacity by end-2014, which will likely cost between RM60 million to RM70 million.
“The group has spent RM180 million over the past year on the refinery and the 100 ha complex it currently sits on in Bintulu, Sarawak.
“The refinery’s current utilisation rate is more than 90 per cent.” Gan noted that the group was experiencing some ‘loss making young trees’ as 5,181ha of its immature oil palm area planted back in 2009 came into maturity in the first quarter of financial year 2013 (1QFY13).
“We also expect a total of 6,400ha of newly matured areas to start producing in FY13,” he added.
“Given the newly-matured area’s relatively low fresh fruit bunches (FFB) yield of five to seven tonnes a year, these areas incurred a loss of RM16 million during the quarter.
“At the current CPO price of RM2,300 per tonne, we estimate that an estate would need to achieve an FFB yield of 12 tonnes before turning profitable.
“These loss-making areas account for 10.3 per cent of SOP’s mature areas.” This, added the analyst, was on the back of refineries returning to the black as Malaysia’s CPO refineries experienced a challenging operating environment in 9M2012, during which some felt the pain of negative margins.
“Nonetheless, the downstream sector managed to turn the corner in 4Q2012 and started registering profits following a recovery in refining margins and the introduction of a RM100 per tonne discount that refiners charge CPO producers in East Malaysia.” Following its sector-wide revision in 2013 and 2014 CPO price assumptions to RM2,400 and RM2,600 per tonne, RHB Research was cutting its FY12 and FY13 earnings forecasts for Sarawak Oil Palms by 35.9 per cent and 36.2 per cent respectively.
“Our fair value is largely unchanged at RM6.84 per share.”
According to RHB Research Institute Sdn Bhd (RHB Research) analyst Gan Jian Bo in a report on the group said with its strong balance sheet, Sarawak Oil Palms has the ‘financial muscle’ to snap up good deals in Sarawak when such opportunities surface.
“The asking prices for planted land have fallen from the days when CPO prices were above RM3,000 per tonne a year earlier,” noted Gan, adding that, “Should CPO prices remain depressed, we think some smallholders with young areas will suffer from cash flow problems and may be forced into selling at distressed prices.
“While the group is not actively looking for new areas, it is willing to issue up to RM600 million to RM800 million in bonds to fund a large acquisition should a good deal emerge, although it would only be keen if the asking price is below RM45,000 per hectare (ha).
“However, such debt financing will enlarge SOP’s net gearing from 0.30 times to 0.81 times to 0.98 times.” Meanwhile, with its fast-growing CPO production, the analyst believed that Sarawak Oil Palms output was capable of outpacing its 450,000 tonne per annum refinery capacity over the next two years.
“It has plans to double its existing capacity by end-2014, which will likely cost between RM60 million to RM70 million.
“The group has spent RM180 million over the past year on the refinery and the 100 ha complex it currently sits on in Bintulu, Sarawak.
“The refinery’s current utilisation rate is more than 90 per cent.” Gan noted that the group was experiencing some ‘loss making young trees’ as 5,181ha of its immature oil palm area planted back in 2009 came into maturity in the first quarter of financial year 2013 (1QFY13).
“We also expect a total of 6,400ha of newly matured areas to start producing in FY13,” he added.
“Given the newly-matured area’s relatively low fresh fruit bunches (FFB) yield of five to seven tonnes a year, these areas incurred a loss of RM16 million during the quarter.
“At the current CPO price of RM2,300 per tonne, we estimate that an estate would need to achieve an FFB yield of 12 tonnes before turning profitable.
“These loss-making areas account for 10.3 per cent of SOP’s mature areas.” This, added the analyst, was on the back of refineries returning to the black as Malaysia’s CPO refineries experienced a challenging operating environment in 9M2012, during which some felt the pain of negative margins.
“Nonetheless, the downstream sector managed to turn the corner in 4Q2012 and started registering profits following a recovery in refining margins and the introduction of a RM100 per tonne discount that refiners charge CPO producers in East Malaysia.” Following its sector-wide revision in 2013 and 2014 CPO price assumptions to RM2,400 and RM2,600 per tonne, RHB Research was cutting its FY12 and FY13 earnings forecasts for Sarawak Oil Palms by 35.9 per cent and 36.2 per cent respectively.
“Our fair value is largely unchanged at RM6.84 per share.”