HOLD
Price: MYR3.14
12-Month Target Price: MYR3.40
Market Value - Total: MYR879.2 mln
Analyst: Siti Rudziah Salikin
Summary: Sarawak Plantation (SPB) cultivates oil palm and produces crude palm oil and palm kernel for sale to local oil refinery, feedmillers 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.
Results Review & Earnings Outlook
SPB’s 2Q08 net profit grew 8.2% YoY to MYR16.4 mln which was below our expectations. Higher-than-projected administrative costs and an effective tax rate of 27.1% (versus our estimate of 10%) were the main reasons for the discrepancy.
The YTD net profit was MYR28.8 mln, up 39.2% YoY, and accounted for 28.6% of our original full-year forecast. The growth was driven by increased crop production and higher palm oil selling prices, which was partly offset by higher cost of production following the increase in fuel and fertilizer costs.
We cut our projected net profit for 2008-2009 by 13.4% and 21.8% respectively after raising administrative cost estimates and factoring a higher effective tax rate of 24.1% for 2008 and 25% for 2009 (from 2007’s 13.7%). We have also imputed the one-off gain of MYR8.9 mln from the recent sale of 1.9 ha of land for MYR9.0 mln.
Overall, we project a stronger 2H on the back of seasonally stronger crop production, which is expected to make up for the projected drop in selling prices. Our forecast assumes an average CPO price of MYR3,200/ton for 2008 and MYR3,000/ton for 2009. We expect CPO price to recover in 4Q08 from the current level of less than MYR2,800/ton 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 Hold recommendation with a revised 12-month target price of MYR3.40 (from MYR3.80).
At 10.1x our projected earnings for 2008, we believe the valuation is fair, given our forward target multiples of between 8x and 10x for medium-sized plantation stocks in our coverage.
The lower target price is due mainly to the downward revisions in our cash flow projections for 2008-2009. 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.
Risks to our recommendation and target price include a continued downtrend in palm oil prices, which could be caused by factors such as increased soybean acreage and volatility of crude oil prices.
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