18.12.2019 (The Edge Markets MY) - Sarawak Plantation Bhd
(Dec 17, RM1.83)
Maintain outperform with an unchanged target price of RM2.80: Following the new management’s measures over the last one year to rehabilitate unproductive young mature areas, as well as encumbered areas’ gradual recovery in the central region, Sarawak Plantation Bhd is set to enjoy a bumper harvesting crop in the coming months — timely amid rising crude palm oil (CPO) prices.

Based on our sensitivity analysis pegged at our CPO price forecast of RM2,600 per tonne, for every 10% increase in fresh fruit bunch (FFB) production growth, it is expected to contribute an additional RM14 million to the group’s bottom line. The company is currently trading at a forward price-earnings ratio (PER) of 13 times, unjustifiable given its explosive earnings growth. We value the stock based on 20 times financial year 2020 (FY20) PER.

Sarawak Plantation, a pure upstream plantation company, has a total harvestable area of 17,240ha. In our view, it could be a big winner in the current CPO price uptrend amid its strong FFB production growth. Its annual FFB production growth is expected at 20% this year; for the cumulative 11 months of 2019 (11M19), it was up 16% year-on-year (y-o-y) and it’s another 20% growth for FY20 forecasts.

The stronger FFB production growth is mainly from the central region, up 39% this year and the northern region grew 11%. Based on the sensitivity analysis, for every RM100 per tonne increase in the CPO price, the company’s bottom line is expected to expand about RM7 million or a massive 40% given a low-base effect.

The group has two palm oil mills in Niah and Mukah with a milling capacity of 60 tonnes hour each, collectively processing up to 720,000 tonnes of FFB a year. Due to an insufficient in-house FFB production, the company spent a massive RM120 million on a third-party FFB purchase — nearly 50% of the total cost of production.

The stronger FFB production growth should help reduce its reliance on a third-party FFB purchase — nearly 68% of the total FFB processed. Led by a strong recovery in palm kernel prices (+27% y-o-y), an improving FFB production and lower spending on a third-party FFB purchase, the group is expected to see a lower cost of production at RM1,600 per tonne for FY20, versus RM1,700 per tonne for FY19.

The management has allocated a capital expenditure of RM25 million to RM30 million for FY20, mainly for replanting 600ha of land as well as an immature area of 6,000ha. For 9MFY19, Sarawak Plantation’s core earnings were RM12.1 million or +24.7% y-o-y — 74% of our full-year earnings projection. We do not rule out earnings surprises in the final quarter given a strong recovery in CPO prices and an improved FFB production. — PublicInvest Research, Dec 17