19/09/2022 (The Edge Markets), Kuala Lumpur - Sarawak Plantation Bhd’s healthy balance sheet is likely to help the group tide through a possible downcycle of the industry as crude palm oil (CPO) prices gradually lose steam, said MIDF Research.

With a strong balance sheet of about only 4% of net gearing registered to-date, the company is now on a stronger footing and liquidity to pursue landbank expansion following the normalisation of estates market price ahead, the research house said in a note on Monday (Sept 19).

MIDF Research, which initiated coverage on Sarawak Plantation with a “buy” recommendation and RM2.70 target price, said that despite recent volatility in CPO prices, they are still higher than normal times.

“Indeed, CPO prices had already fallen to pre-invasion [by] Russia levels by July 22, but prices remain higher than 30 months earlier,” the firm said.

“Even if earnings may be capped by the moderating of lower average selling prices realised ahead, we think its current share price still has further upside,” it added.

MIDF said this is supported by ongoing operational efficiency as the management continues to develop a clear vision for the company by enhancing its estates operations, leveraging experienced estates managers.

Previously, MIDF noted that Sarawak Plantation’s planted area had been poorly managed, but after the arrival of these managers, there has been a significant transformation plan implemented at management, staff and, most crucially, operating levels.

“The company’s young and mature areas now account for 65% of harvestable areas, indicating the increased output is on the way.

“We anticipate that the new replanting methodology by management from experienced estates manager, will further enhance its age profile,” it said.

The research firm also likes the stock’s alluring dividend yield of 8.1% as the group has been paying 10 to 20 sen dividend per share over the past four years, thanks to consistent cash flow generation from its operations.

“We anticipate that Sarawak Plantation will remain paying at least 20 sen dividend per share annually for the future, therefore rewarding shareholders while pursuing long-term growth,” it said.

In terms of profitability, MIDF expects the group's earnings to stay consistent at RM121 million to RM120.7 million over 2022 to 2024, backed by further production output from encumbered areas coming on stream despite normalising “supernormal profits” amid correction to CPO prices.

Sarawak Plantation closed four sen or 1.9% lower at RM2.03 per share, giving it a market capitalisation of RM568.4 million.