The Star Online (28/05/2020) - KUALA LUMPUR: RHB Research is keeping a “buy” call on SARAWAK OIL PALMS BHD with a higher target price of RM3.10, from RM2.70 previously as its earnings for the first quarter ended March 31 (1Q20) were well above its expectations and street full-year estimates.

The research house said the group’s 1Q20 earnings were well above its expectations at 37% and 38% of street financial year 2020 projections as the core net profit for the quarter almost quadrupled year-on-year.

It added that Sarawak Oil Palms sensitivity to crude palm oil (CPO) prices was a boon to its earnings in 1Q20, given the 35% year-on-year surge in average selling price of CPO.

“Sarawak Oil Palms recorded CPO and palm kernel prices at RM2,679 per tonne and RM1,869 per tonne in 1Q20, which boosted profits significantly, given its sensitivity to CPO prices.

“We estimate that every RM100 per tonne change in the CPO price would impact net profit by 8% to 10% per annum, ” RHB Research noted.

It also pointed out that Sarawak Oil Palms valuations remain reasonable at 13 times price-to-earnings ratio for financial year ending Dec 31,2020 forecast (FY20F) compared with its peers which trade at price-to-earnings ratio of 15 to 18 times.

Meanwhile, RHB Research said its earnings before interest and tax (EBIT) margin widened to 14% in 1Q20 compared to only 3% in 1Q19 on the back of higher CPO price as well as cost reducing to RM1,650 per tonne from RM1,700 per tonne a year ago.

The reduction in cost was mainly driven by its ongoing cost-cutting initiatives, improving age profile, as well as slightly lowers fertiliser application in the quarter.

“While management expects to catch up on its 2.2 fertiliser application in the coming months, it expects unit costs to remain relatively flat from hereon, due to improving yields, ” it said.

“As such, we reduce our unit costs assumptions slightly for FY20-22, ” it said.

After lowering its unit cost assumption by 2% to 3%, RHB Research is also raising Sarawak Oil Palms earnings for FY20-FY22 forecast by 1%- 8%.

Read more at https://www.thestar.com.my/business/business-news/2020/05/28/sarawak-oil-palms-q1-earnings-above-expectations