PRODUCTION GROWTH: Photo shows a plantation worker gathering fruit bunches at one of SOP’s
oil palm estates. Gan expects the company to see a 17 per cent boost in FFB production this year.

16/03/2012 (Borneo Post) - Sarawak Oil Palms Bhd (SOP), a Main Market listed planter, is expected to see a 17 per cent boost in fresh fruit bunch (FFB) production and ramp up crude palm oil (CPO) production, putting behind the production slump experienced in the fourth quarter of 2011 (4QFY11)

According to OSK Research Sdn Bhd (OSK Research) analyst Gan Jian Bo, the company was hit by a lumpy refining capacity backlog which led to delays in CPO shipments and revenue recognition, causing its share price to retreat by as much as 4.3 per cent following that quarter.

However, Gan believed things were looking up for the planter this year, with a forecasted net profit of RM255.9 million on the back of RM2.19 billion turnover for FY12.

He remarked, “In anticipation of SOP’s maiden refinery coming on stream in 2QFY12, the company has been buying CPO from vendors to blend with its own CPO for shipment.

“The company’s rationale was this would allow it to secure CPO suppliers for its refinery before it commences operation, on the understanding that a supplier who sells its CPO to another refinery is unlikely to return to SOP when the company’s refinery starts running.

“CPO trading could actually intensify in 1QFY12 as SOP builds up its CPO supplier base. We find comfort in learning that this move did not give rise to trading losses. SOP in fact made a negligible RM0.1 million profit from it,” he elaborated.

The analyst believed that the 1QFY12 earnings should not reflect much impact on an absolute basis although margins would naturally narrow as SOP progresses down the value chain.

Some 30 per cent of the company’s refining capacity would be utilised by third party CPOs.

SOP’s outlook remained bright as its turnaround measures for FY12 would leave behind its poorer than expected 4QFY11 earnings which were dragged down to RM43.3 million, down 42.8 per cent quarter-on-quarter (q-o-q).

This was from turnover of RM313.6 million (down 3.8 per cent y-o-y), fueled by a 9.3 per cent drop q-o-q of FFB production, a corresponding 9.5 per cent drop in CPO production and a marked depreciation of RM17.1 million for the quarter.

SOP also paid out higher performance-based employee compensation after a record year. The provision for its staff bonus and management gratuity fund stood at RM4.5 million to RM6.5 million.

Therefore, Gan thought SOP would be unlikely to see lumpy employee costs in 1QFY12 and viewed this increase in performance-based employee compensation positively as it would enhance work force stability and talent retention.

He remained confident on the company’s production growth potential and sound management, choosing it as OSK Research’s top pick among Malaysian planters and pegging its fair value at RM7.09 per share, based on 12 times FY12 price earnings ratio.