swkplnt - 1QFY08 review

1QFY08 results seasonally within expectations

1QFY08 net profit of RM12.4m was seasonally in-line with expectations comprising 13% of our earnings estimates of RM98.4m and consensus comprising 10% of consensus estimate of RM 119.5m. 1Q net profit of plantation companies is generally the lowest due to seasonally lower CPO/FFB production.

Reaped the full benefits of higher CPO prices realised. 1QFY08 net profit of RM12.4m was 124% higher YoY primarily due to higher average CPO price realised. Sarawak Plantation recorded 1QFY08 average CPO price of RM3,033/MT which was 63% higher YoY compared to 1QFY07 average CPO price of RM1,863 /MT.

Although 1QFY08 average CPO price of RM3,033/MT was 7% higher QoQ, 1QFY08 net profit of RM12.4m was 57% lower QoQ because 1QFY08 FFB production of 74,981MT was seasonally 22% lower QoQ and management restrained sales in anticipation of higher CPO prices going forward.

No revision in earnings estimates. 1Q net profit of pure plantation companies such as Sarawak Plantation typically comprise between 10% and 20% of full year net profit estimates due to seasonally lower CPO/FFB production. Inventories more than doubled QoQ to RM30.7m and when sold, will more than compensate for the 1QFY08 net profit shortfall.

Maintain BUY call and RM4.50 target price based on 13x FY08E PER and 10% discount (for illiquidity) to RNAV of RM5.05. At 11x FY08E PER, Sarawak Plantation provides one of the cheapest exposures to upswings in palm oil prices.

Growth beyond FY10E will be driven by new areas coming into maturity. Management intends to plant 7,000ha with oil palms in FY08E which will mature by FY11E and 8,000ha with oil palms (under two 60% JVs with Pelita Holdings) in FY09E which will mature by FY12E.


Outlook
Expect FY0 8 results to improve further on higher CPO prices. We expect CPO prices to average at RM3,100/MT in FY0 8. This assumptions is conservative as CPO prices are already at RM3,500/MT. Therefore, we expect FY08 net profit to grow by at least 44% YoY.

As Sarawak Plantation is a pure plantation concern, its earnings are highly sensitive to fluctuations in CPO prices. We estimate that every RM100/MT change in average CPO price translates into 2 sen change in EPS or 26 sen change in target price (utilising 13x FY08E PER).