sop August 15, 2008

Price: MYR5.35
12-Month Target Price: MYR7.10
Market Value - Total: MYR1,085.1 mln
Strong Buy

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




Results Review & Earnings Outlook
SOP’s 1H08 results were within our expectations. 2Q08 net profit jumped 2.3x YoY to MYR44.2 mln, bringing the YTD profit to MYR87.7 mln versus MYR29.8 mln in 1H07.

SOP’s crude palm oil production rose 47% YoY to 95,371 tons in 1H08 due to a recovery in palm yields, increased harvesting area and higher FFB processed at the mills (the mills’ capacity was expanded in 4Q07). Based on MPOB’s price, the average palm oil price increased to MYR3,500/ton in 1H08 from MYR2,200/ton in 1H07.

We maintain our projected net profit growth of 61.7% YoY for 2008 to MYR176.7 mln. Palm production is seasonally stronger in 2H, which is expected to make up for the drop in selling prices.

We continue to assume an average CPO price of MYR3,200/ton for 2008 and MYR3,000/ton for 2009. In spite of near-term volatility, we expect CPO price to recover in 4Q08 as palm oil inventory comes down due to traditionally stronger exports in 4Q and palm oil enters its low production period in 1Q. The still tight stock-usage ratio of global oilseeds should also provide the downside support to the price.

Recommendation & Investment Risks
We maintain our Strong Buy recommendation on the stock but with a lower 12-month target price of MYR7.10 (from MYR7.80).

While the current palm oil price volatility is affecting the share price performance in the near term, we believe the potential long-term growth for SOP remains good given the young profile of its existing planted areas and the new plantings.

We continue to use a discounted cash flow method to value SOP to capture future cash flows from its new plantings but have rolled over our valuation to 2009. Our main assumptions are: (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 10.1% and 11.6%.

SOP is issuing a 1-for-1 bonus (ex-date: Aug. 26), which could help to improve the share trading liquidity, in our opinion.

Risks to our recommendation and target price include (i) a continued downtrend in palm oil prices, which could be caused by factors such as increased soybean acreage and volatility of crude oil prices, and (ii) delay in the completion of its new plantings.