Better days for S’wak Plantation – TA Securities

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KUCHING: Despite being down and under, better days ahead are expected for local palm oil player Sarawak Plantation Bhd (Sarawak Plantation) with earnings already gathering an uptrend momentum.

INCREASED ACTIVITIES: Photo shows oil palm saplings receiving water from a sprinkler system at Sarawak Plantation’s nursery at Matadeng New Development Area in Mukah. Ratnam opines that new planting activities for the group will gather steam from this year onwards.

For the first nine months of last year, the group’s net profit rose 75 per cent year-on-year to RM31 million despite achieving only a 4.8 per cent increase in revenue and 10 per cent contraction in crude palm oil (CPO) production.

“While higher CPO price is a contributing factor, improvement in operating efficiency led was a major drive,” observed TA Securities Holdings Bhd’s senior research analyst James Ratnam in response to an e-mail yesterday.

In addition, the analyst also believed there would be further upside to Sarawak Plantation’s earnings on the back of higher CPO price, yield recovery boosting harvest and further earnings accretion from efficiency gain.

To note, the group’s total land bank grew from 33,000 hectares to 52,000 hectares, mostly via acquisitions and proposed development of Native Customary Rights (NCR) land.

“The group owns another 16,100 hectares of plantable area where the management targets to develop 14,000 hectares in the next two years, boosting a total planted area to approximately 45,000 hectares, or a 56 per cent increase from 28,749 hectares as at the end of 2010,” explained Ratnam.

Moreover, the analyst opined that new planting would gather steam from this year onwards.

“Management targets to increase land bank to 100,000 hectares by 2015, which we believe is a realistic target. Recent newsflow indicated that the state government had indentified 720,000 hectares NCR land that would be developed into palm oil plantation.

“Being closely related to the state government alongwith its primary mission to develop the palm oil industry in the state, we believe Sarawak Plantation will be given priority over acquisition of NCR land.”

Correspondingly, these developments would address the setbacks seen in Sarawak Plantation’s fresh fruit bunch (FFB) yield due to a combination of factors, noted Ratnam.

Despite having a relatively young trees age profile of 12 to 13 years on average, FFB yield had declined from 19.07 tonnes per hectare in 2006 to a mere 12.93 tonnes per hectare in 2009.

“Last year was no better with a further contraction to 11–12 tonnes per hectare. A combination of elements – government regulations limiting foreign workers, infrastructure bottleneck, yield contraction from old trees as a result of lower agronomic input and erratic weather condition – were all key factors resulting in the inferior yield.

“Notably, the impact of weather is more pronounced on Sarawak Plantation given that bulk of its estates are located on peat soil, which are more sensitive to abnormal weathers,” the analyst disclosed.

However, the group, according to Ratnam, had estimated FFB harvest could increase by 20 per cent this year, assuming labour shortage would diminish and normal weather conditions became normalised.

“We think a 20-per cent increase is not far-fetched, given the relatively low-base yield of 11.29 tonnes per hectare versus national average of 14.89 tonnes per hectare.

“We estimate Sarawak Plantation would only have to increase by 11 per cent year-on-year to meet the FFB growth target,” he outlined.

As for infrastructure bottleneck, the group spent over RM13 million in the past 21 months for upgrades, of which Ratnam said funding on the group’s part “is not an issue”.

“The group is currently in net cash position with cash hoard of about RM129 million. Assuming development cost of RM15,000 per hectare, we estimate total cost to develop the entire plantable area is about RM241.5 million. Further assuming that Sarawak Plantation could comfortably gear up to one time, we estimate that the group has the financial capacity to acquire another 26,000 hectares based on the above-mentioned development.”

Meanwhile, positive catalyst was also seen in terms of foreign labour utilisation where the federal government recently agreed to allow higher intake in the plantation sector. In Sabah, the state lifted a moratorium of intake in foreign labours from countries other than Indonesia and Philippines, underscoring rising recognition on the authorities’ part of acute labour shortage in the industry.

“We understand that the company recruited 200 workers in December and targets to recruit another 300 workers by end of this month,” Ratnam said further.

Based on all these factors, Sarawak Plantation remained an attractive stock – subject to its success in delivering its operational targets.

“Sarawak Plantation is currently not under our active coverage list,” said Ratnam.

“Consensus estimates a net profit of RM57 million for the group this year, which translates into an earnings per share of 20.3 sen. We derived at an indicative fair value of RM2.62 after applying an approximately 10 per cent discount to the 14.3-times market cap weighted average price-earnings-ratio of small- and mid-cap plantation stocks.

“The discount is to reflect the smaller market cap of Sarawak Plantation, which translates into a mere total potential upside of 7.9 per cent at the current price,” the analyst pointed out.