sop by sp

Price: MYR6.05
12-Month Target Price: MYR7.80
Market Value - Total: MYR1,227.1 mln
Summary:
Sarawak Oil Palms (SOP) cultivates oil palm and operates palm oil mills. It has over 60,000 hectares of plantation land in Sarawak.
Analyst: Siti Rudziah Salikin


SOP’s 1Q08 performance was within our expectations. Net profit grew over four fold to MYR43.6 mln driven by higher palm oil selling prices and sales volume.

The benchmark Malaysian Palm Oil Board’s average spot price was about MYR3,490/ton versus MYR1,950/ton in 1Q2007. The better selling prices outweighed the increase in production costs brought about by higher prices of crude oil and fertilizer.
(just benchmarking from mpob, not the actual sop selling price.)


SOP’s crude palm oil production rose by over 40% YoY to 42,849 tons due to a bigger harvesting area, improvement in yields and higher FFB intake at the palm oil mills. The total capacity at the mills, which processes FFB from SOP’s own estates and outside purchases, was increased to 225 tons/hour in 4Q2007 from 168 tons/hour.

We maintain our projected net profit growth of 61.7% YoY for 2008 to MYR176.7 mln, which assumes average CPO price of MYR3,200/ton.

We reiterate our Strong Buy recommendation on the stock with an unchanged 12-month target price of MYR7.80.

At a PER of 7.3x (on fully-diluted earnings for 2008), we believe the share price has not fully factored in the potential long-term growth for SOP arising from the young profile of its existing planted areas and the new plantings.

We use a discounted cash flow method to value SOP assuming: (i) SOP will undertake 5,000 ha of new plantings per year at its existing undeveloped land; (ii) the entire planted area will reach full maturity by 2020; (iii) long-term CPO price of MYR2,500/ton; and (iv) a weighted average cost of capital of between 10.2% and 11.4%. We add our projected dividend of 6 sen per share for 2008 to arrive at the target price.

Dividend payout ratio is likely to stay low due to the group’s long-term objective of sustaining growth by substantially reinvesting its profits.

Risks to our recommendation and target price include (i) a reversal of the CPO price uptrend, which could be caused by increased global acreage of oilseeds and volatile energy prices, (ii) delay in the completion of its new plantings; and (iii) a potential windfall tax to curb
inflation.

filed: sp SOP 1Q08 results.pdf