05.05.2021 (www.thestar.com.my) - PETALING JAYA: Sarawak Oil Palms Bhd (SOP) would be one of the key beneficiaries of a sustained higher crude palm oil price (CPO).

According to UOB Kay Hian (UOBKH) research, the company’s net profit could jump by as much as 32% with a CPO price assumption of RM3,500 per tonne.

“We expect SOP earnings to increase 13% year-on-year (y-o-y) for 2021.

“We expect higher y-o-y earnings from the upstream operation, leveraging on high palm oil product prices, ” it said.

“Besides, SOP guided that the group had stopped forward sales and there is some carry forward sales volume from late 2020 (less than 25% of 2020’s total production) which will be committed in 2021, ” UOBKH added.

It also noted that SOP’s management had guided fresh fruit bunches (FFB) production for this year would be at 1.45 million tonnes or a 7% y-o-y FFB production growth which also takes into consideration the present labour shortage it is facing.

“Assuming SOP is able to bring in more foreign workers this year, there will be more upside in its FFB production. But we remain conservative factoring in 4% y-o-y FFB production growth for 2021, ” it said.

“We maintain our earnings forecasts for 2021-2023 at RM244mil, RM163mil and RM175mil respectively, ” it added.

The research house maintained its “buy” rating on the stock with a target price of RM4.75, based on an 11 times forecast 2021 price to earnings ratio, or a negative 1 standard deviation of the stock’s five-year mean level.

It noted that SOP has submitted relevant documentation to the authorities to recruit foreign workers while incentives have also been given to the existing labour force in an effort to retain them.

“According to our channel checks, plantation companies are allowed to bring back labour with the approval of the relevant authorities.

“All Covid-19 related expenses would have to be borne by SOP with an estimated cost of RM2mil-RM3mil for 2021.

SOP said if the process to recruit labour is approved, this would reduce the labour shortage from 30% to below 20%, ” UOBKH said.

Meanwhile, SOP’s cost of production is expected to be higher in 2021 from the previous year mainly due to harvesting and additional incentives to retain workers, UOBKH said.

“Besides, fertiliser costs have increased significantly due to the rising prices of raw materials.

“Management guided that SOP managed to secure its volume where prices were flat y-o-y in the first half, but the second half’s fertiliser prices should be higher y-o-y, ” it added.