SOP remains top pick despite struggling FFB production in 2Q
Posted on August 4, 2012, Saturday
KUCHING: Sarawak Oil Palms Bhd (SOP) saw its fresh fruit bunch (FFB) production struggled in the second quarter of 2012, in line with the industry’s weaker output.
“The company’s second quarter production sank 9.8 per cent year-on-year (y-o-y), bring the first half of 2012 production (1H12) to 355,876 tonnes, some 2.5 per cent less than the 1H11’s output,” said OSK Research Sdn Bhd (OSK Research) in its research report.
The research firm noted that April was a month that was hit the hardest as the FFB harvested declined 19.4 per cent y-o-y and that monthly y-o-y production growth had remained in the negative territory, but had improved substantially to a ‘more manageable’ -5.3 per cent.
However, OSK Research observed an increase in SOP’s second quarter 2012 production (2Q12)of 18.2 per cent quarter-on-quarter (q-o-q) as palm output entered its seasonal upcycle.
“SOP performed comparatively better than its country peers as a whole as Malaysia’s crude palm oil (CPO) production dropped 9.1 per cent y-o-y in the 1H12, with the 2Q12 production falling by 17.9 per cent y-o-y but rising by 11.9 per cent q-o-q,” the report noted.
With 68.2 per cent of the company’s 62,948 hectares of planted area still below peak production, OSK Research stated that organic production growth from SOP’s comparatively younger tree age profile aided the company in weathering some of the unfavourable climate effects on output.
It added that new planting for the company was slower in 1Q12, with planted area increasing by just 193 hectares during the quarter as the company focused on getting its maiden refinery in Bintulu on-stream.
“SOP is looking to plant new trees on 2,800 hectares by end of the year, this will increase the total planted area to 66,000 hectares. This will pretty much exhaust its existing 72,653 hectares landbank,” the research firm commented, believing that the company had been waiting for Sarawak plantation land prices to soften before expanding its landbank and remained cautious about expanding to the neighbouring Indonesia.
In view of the 1H12’s weak production, OSK Research toned down its FY12 FFB production growth forecast to 10.3 per cent from the previous 16.1 per cent.
It highlighted that this still implied a 20.5 per cent y-o-y growth for 2H12, in line with its view that the production would be skewed towards the second half of the year.
OSK Research also upgraded SOP’s FY12 estimated earnings to RM314.1 million, up 5.7 per cent from RM297.1 million previously. This upward revision trailed the research firm’s 2013 average CPO price assumption upgrade to RM3,500 per tonne.
As such, the research house valued SOP at RM9.37 per share based on a 13 times FY13 price earnings ratio (PER), adding that, “Despite our forecast changes and a likely challenging 2QFY12 earnings performance, the company was still trading at an attractive 13.4 times FY12 PER and 9.5 times FY13 PER.