Price: MYR3.48
12-Month Target Price: MYR3.80
Date: July 11, 2008
GICS: Consumer Staples/Agricultural Products
Market Value - Total: MYR974.4 mln
Summary: Sarawak Plantation (SPB) cultivates oil palm and produces crude palm oil and palm kernel for sale to local oil refineries, feed millers and poultry farms. It has 51,161 ha of plantation land in Sarawak and two palm oil mills with a processing capacity of 180 tons of FFB per hour.
Analyst: Siti Rudziah Salikin
code: 5135
Highlights
With its recent acquisition of 7,620 ha of land(#1) and the development of another 10,786 ha(#2) of Native Customary Rights land(#3) in joint ventures with the state government and native landowners, SPB’s total plantation land in Sarawak has expanded to 51,161 ha(#4). These new projects will support production growth in the longer term.
#1 total purchase price of RM19,050,000 dated on 22.04.2008.
#2 60% shareholding in JV in plantable area totaled 6472ha, acquisition price is lesser impact which only RM1200 per ha thereon total land (10,786 ha). On 28 November 2007.
#3 defining Native Customary Rights
#4 denote total land bank, neither planted area / plantable area.
In the medium term, the growth in production will come from a recovery in palm yields (following a two-year decline) and an increase in new areas coming into production and young areas reaching full maturity.
We expect the price of CPO, which averaged MYR3,500/ton in 1H08,to soften toward the later part of 2008 to coincide with the peak production period of oil palm in Malaysia and Indonesia. However, downside risk is buffered by the current tight global supply/demand of edible oils and the adverse weather conditions, which have delayed the plantings of soybean in the U.S.
We project a 47.6% YoY growth in net profit for 2008 and a 4.5% YoY decline for 2009, assuming an average CPO price of MYR3,200/ton and MYR3,000/ton, respectively.
Investment Risks
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 (ii) volatile energy prices.
Recommendation
We initiate coverage on SPB with a Hold recommendation and a 12- month target price of MYR3.80. SPB’s earnings prospects are encouraging, driven by the strength of palm oil prices and the growth in production. Nevertheless, much of this is reflected in present valuations, in our opinion.
At 9.7x our projected earnings for 2008, we believe the valuation is fair given the forward multiples of between 8x and 10x for medium-sized plantation stocks. We use a discounted cash flow method to value SPB. Our key assumptions are: (i) its new plantings will be completed over the next three years with the palms reaching peak maturity by 2020; (ii) a long-term CPO price of MYR2,500/ton; and (iii) a WACC of between 9.4% and 10.5%. We add our projected dividend to arrive at our 12-month target price for the stock.
SPB has healthy cash balances of MYR129.5 mln (as of end-March 2008) with total borrowings of MYR50 mln. Based on our cash flow estimate, SPB should be able to finance its new plantings mostly using its own cash while at the same time pay out 40% of its net profit to shareholders as dividend. This will translate into a dividend per share of 14.5 sen for 2008, yielding 4.2% at the current share price.
SPB is committed to Corporate Social Responsibility (CSR) as a sustainable approach to business. The group has made contributions and organized various CSR-related activities that benefit customers, employees, shareholders and communities in general.
Background
Sarawak Plantation Berhad (SPB) was specially incorporated in October 1997 as the vehicle company for the privatization of Sarawak Land Development Board’s (SLDB) assets. SLDB develops large-scale oil palm plantations in Sarawak to create employment opportunities, increase income and improve the standard of living of the rural community.
With the privatization, all principal assets of SLDB (comprising oil palm plantations, milling facilities and related assets) are now owned and managed by SPB and its subsidiaries, Sarawak Plantation Agriculture Development Sdn Bhd (SPAD) and Sarawak Plantation Property Holdings Sdn Bhd (SPPH). The Sarawak state government, through the State Financial Secretary now owns 25.4% of SPB. SPB’s senior management team, led by Group Managing Director, Haji Mohamad Bolhair, has 20 years of experience in the oil palm plantation industry.
SPB was listed on the Main Board of Bursa Securities in August 2007.
Corporate Structure
The oil palm plantation business
SPB is one of the main players in the oil palm plantation industry Sarawak. As of end-2007, SPB had a total planted area of 27,238 ha, including 1,855 ha that are developed by 60%-owned SPB Pelita Suai under the Native Customary Rights (NCR) land development scheme.
SPB will be developing another 10,786 ha of NCR land (with a plantable area of 6,472 ha) in Sarikei and Mukah. The land will be developed under two joint ventures (JVs), which were signed in November 2007 with Pelita Holdings Sdn Bhd (Pelita). SPB holds a 60% stake in the JVs with native landowners and Land Custody and Development Authority of Sarawak owning 30% and 10%, respectively via Pelita. SPB has also acquired 7,620 ha of plantation land from Lembaga Amanah Kebajikan Masjid Negeri Sarawak for MYR19.1 mln. The sale and purchase agreement
became unconditional on April 22, 2008.
With the additional land from the JVs and the new acquisition, SPB’s total plantation land in Sarawak has expanded to 51,161 ha. SPB targets to plant about 7,000 ha of the land in 2008 and 10,000 ha in 2009. These new plantings are expected to start producing in 2011/2012.
SPB’s existing oil palm estates are relatively mature. As of end-2007, 43.8% of the planted areas constituted prime palms (between the ages of seven and 15 years) and 17.5% past prime trees (16-25 years). Another 29.8% of the planted areas were either young mature (3,443 ha) or
immature trees (4,687 ha). The remaining 8.8% or 2,400 ha are old estates, which will be replanted over the next two years. Once completed, SPB does not expect to do any more replanting for the next seven to ten years.
FFB yields for SPB dropped for two consecutive years in 2007 to 15.99 tons/ha. The drop was attributable to the effect of a downcycle in biological yields (which affect the oil palm industry every three to four years) and the replanting of old trees. The weather has been good and the yield has since recovered. For SPB, there are also 3,443 ha of young palms that will gradually reach the peak maturity and about 1,000 ha of the immature areas are expected to come into production per year. These will support a growth in FFB production going forward.
Large areas of prime palms contribute to above-average FFB yields
SPB, which has fully mechanized about 75% of its plantation area, will continue with its mechanization program to increase the workers’productivity as well as reducing its labor dependency and FFB production costs. SPB also undertakes cattle integration farming at its oil palm estates. This, to a certain extent, has helped the estates in managing its weeds and decreasing the use of herbicide. Generally, production costs have risen with the increase in fertilizer and herbicide prices. We understand that the high crude oil price and increased global demand from the agriculture sector have pushed up fertilizer prices to about MYR1,800-MYR1,900/mt currently from below MYR1,300-MYR1,400/mt in early 2008 but SPB had locked in its fertilizer requirements for 2008 in late 2007 and early 2008.
SPB has two palm oil mills located at Mukah and Niah. The mills’ total processing capacity was raised to 180 tons/hour following the upgrade of the Niah mill to 120 tons/hour from 60 tons/hours in December 2007. With the increase in the capacity, SPB is now able to process all the FFB
produced from its own plantations in addition to FFB purchased from local smallholders, which is part of its community services. The CPO and palm kernel are sold mainly to Bintulu Edible Oils Sdn Bhd (BEO), which is one of Sarawak’s largest oil refiners and palm kernel crushers. At the same time, CPO and PK have ready markets, thus SPB is also able to sell its produce to other refineries in Bintulu.
Earnings Outlook
Being purely an oil palm plantation group, SPB will benefit from the current strength of palm oil prices. SPB recorded a 2.5x YoY rise in recurring net profit for 2007 (2006 results included a disposal gain of MYR62.2 mln) as palm oil prices surged, which outweighed the drop in CPO production. SPB realized an average CPO price of MYR2,455/ton for 2007 versus MYR1,485/ton for 2006.
Earnings growth for 2008 will be strong supported by higher CPO price, which averaged MYR3,500/ton in 1H08. FFB yield has also recovered from its downcycle trend and we project the yield to improve to 17.5 tons/ha in 2008 from 15.99 tons/ha in 2007. SPB’s 1Q08 net profit was MYR12.4 mln, up 2.3x YoY. Earnings are expected to accelerate in the remaining quarters because: (i) SPB held back CPO sales in 1Q08 in anticipation of higher prices going forward; and (ii) FFB production is seasonally stronger in the 2H of the calendar year.
We still maintain our view that CPO price will soften toward the later half of 2008 to coincide with the peak production period of palm oil in Malaysia and Indonesia. Other bearish factors are the possibility of the EU reviewing its ambitious biofuel target (of 10% of all transport fuel from renewable sources by 2020) and the crude oil price slide. However, we see the prospect of a sharp price correction to be limited, given the strong underlying demand and the current tight supplies of other edible oils. adverse weather conditions, which have delayed the plantings of soybean in the U.S., may also reduce earlier expectations of a larger supply of soybean for the current production season.
We project a net profit of MYR100.7 mln for 2008, up 47.6% YoY, which assumes an average CPO price of MYR3,200/ton and a 9.3% YoY growth in CPO production. We are looking at a lower net profit of MYR96.2 mln for 2009, down 4.5% YoY, as we factor in a lower average CPO price of MYR3,000/ton and 4% YoY increase in CPO output.
Rising production costs remains a concern. For 2008, higher CPO selling prices and the locked-in fertilizer requirements will provide a buffer. However, margins could be under pressure in 2009 if the prices of crude oil and fertilizers stay high.
Valuation
The stock currently trades at 9.7x our projected earnings for 2008. We believe the valuation is fair given the forward multiples of between 8x and 10x for medium-sized plantation stocks.
We use a discounted cash flow method to value SPB as it captures potential contributions from the new oil palm plantings on SPB’s future earnings and cash flows. Our key assumptions are: (i) the new plantings will be completed over the next three years (versus SPB’s target of two years) with the palms reaching peak maturity by the year 2020; (ii) a longterm CPO price of MYR2,500/ton; and (iii) a WACC of between 9.4% and 10.5%. We arrive at an intrinsic value of MYR1.08 bln or MYR3.65 per share and add our projected dividend of 15 sen per share for 2008 to arrive at a 12-month target price of MYR3.80 for the stock.
SPB has healthy cash balances of MYR129.5 mln (at group level, as of end-March 2008) with total outstanding borrowings of MYR50 mln. The cash included MYR49.5 mln remaining from the proceeds of its recent IPO (for capital expenditure and working capital requirements). Based on our earnings and cash flow forecast, SPB should be able to finance its new plantings mostly using its own cash while at the same time pay out 40% of its net profit to shareholders as dividend. This will translate into a dividend per share of 14.5 sen for 2008.
Recent Development
April 2008: SPB announced 1Q08 results. Net profit rose 2.3x YoY to MYR12.4 mln on the back of a 57.8% YoY increase in revenue to MYR51.9 mln due to higher palm oil selling prices.
November 2007: SPB’s wholly-owned subsidiary, Sarawak Plantation Agriculture Development Sdn Bhd signed sale and purchase agreements with Lembaga Amanah Kebajikan Masjid Negeri Sarawak (LAKMNS) for the purchase 7,620 ha of plantation land for MYR19.1 mln. The agreement became unconditional in April 2008 as LAKMNS obtained the consent of the Director of Lands and Surveys for the transfer of the plantation land.
November 2007: SPB signed two joint venture agreements with Pelita to develop 5,340 ha in Sarikei and 5,446 ha in Mukah held under NCR land into oil palm plantations. SPB will hold a 60% stake in the joint venture companies, namely SPB Pelita Wak Pakan Plantation Sdn Bhd and SPB Pelita Mukah 5 & 6 Plantation Sdn Bhd.
No comments:
Post a Comment