PETALING JAYA: Analysts anticipate higher earnings for Sarawak Oil Palms Bhd
(SOP), backed by higher fresh fruit bunch (FFB) growth and improving downstream utilisation, albeit partially offset by slightly higher crude palm oil (CPO) unit costs.
Additionally, on the margin front, SOP managed to stay in the black in financial year 2023 (FY23) and expects to remain profitable in FY24 due to a better product mix and new marketing strategy.
Despite its strong start to the year, with both CPO and FFB growth of 17% quarter-on-quarter and 12% year-on-year (y-o-y), RHB Research said SOP is sticking with its FFB growth targets of between 5% and 6% for 2024.
This was considering the residual impact of El Nino in the second half of 2024 (2H24), especially in the northern regions, as well as its more aggressive replanting targets of 5,000ha to 6,000ha in 2024 and 2025.
“We note, however, that the northern areas make up only 8% to 10% of the total planted areas.
“Bearing this in mind, we raise our FFB growth assumption for FY24 to 7.3% from the initial 6%, while FY25 and FY26 are at 3% to 4% growth,” it stated.
According to RHB Research, SOP is targeting to achieve a utilisation rate of 80% to 85% for the refineries in FY24 as compared to 65% to 70% in FY23.
SOP’s total downstream capacity rose by 53% to 690,000 tonnes, following the official launch of its new multi-feed higher quality oil refinery with a capacity of 240,000 tonnes per annum in the first quarter of 2024 (1Q24).
RHB Research noted that the new refinery has been running since 2023 and produces higher quality oils, which was said to be marketed at a slight premium to normal products of around 5%.
“Given the higher-than-expected utilisation rate in FY23, we raise our utilisation rate to 75% for FY24 to FY26,” it added.
RHB Research said SOP is also expecting costs of production to drop 3% y-o-y to RM2,800 per tonne in FY24, led by lower fertiliser costs and output improvement.
In FY23, the cost of production came in at roughly RM2,900 per tonne, which was higher by 9% y-o-y, excluding palm kernel credit.
It was also noted that SOP only applied 70% of its fertiliser requirements in 1Q24, due to some logistics timing issues.
“As such, given the catch up in manuring activities in the coming quarters, we raise our CPO unit costs slightly by 2% to RM2,830 per tonne, in line with management’s guidance for FY24 while expecting flattish growth for FY25 and FY26,” RHB Research added.
That being said, RHB Research increased its FY24 to FY26 earnings estimates by 2% and 3% and maintained a “buy” call on SOP with a new target price of RM3.30 per share, with a 14% upside with 3% yield.
“We believe the stock remains attractive, trading at 7.5 times FY24 price to earnings as compared to its peer range of seven to 10 times price to earnings,” it added.
