Sarawak Oil Palms
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PP10551/07/2012 (030567) 22 Feb 2012 OSK Research | See important disclosures at the end of this report 1 MALAYSIA EQUITY Company Update Sarawak Oil Palms First Among Equals We flew into Miri, Sarawak recently to meet up with Sarawak Oil Palms (SOP) management who brought us around its plantations. We liked what we saw during the trip, reinforcing our view that SOP is a well-run company with management competence rare for a plantation company its size. Coupled with one of the best tree age profiles in the industry, SOP is among our favourite plantation picks. Its new downstream venture will commence operations in April, thus removing its dependence on third-party refiners and providing SOP with closer access to end consumers. Maintain BUY with FV of RM7.03. Heading East. We recently organized a 2-day trip to visit SOP’s oil palm operations. Despite the occasional rain (we were forewarned of the potentially damp weather), we managed to explore the company’s mineral soil plantation, 9-metre-deep peat soil oil palm estate and one of the world’s largest palm oil mill. We also toured Shin Yang’s plywood manufacturing facility and shipbuilding yard (and had an ex-general lead us on board his navy landing craft currently under construction). The peat specialist. One may be wondering how SOP was actually able to achieve commendable yields when more than half of its estates are on peat. The visit gave us an opportunity to gain an insight into its operations and basically reaffirms our view that the company’s management knows how to get the best out of peat soil – a soil type that has hampered the success of many planters. One of the youngest in town. With 33% of its trees still immature and 77% of its trees below peak production age, SOP has one of the best tree age profiles among companies within our plantation universe. At 820,997 tonnes, FY11 FFB production growth came in at 22%. We expect FY12 production growth to still be in the high teens at 17%. Refinery slated for April. SOP’s 1,500 tonne-per-day refinery, which will be able to accommodate all of its CPO production, is coming on stream in two months and thus, eliminating its dependence on other refiners like Wilmar. While the Malaysian refining landscape appears challenging relative to that of Indonesia, a more integrated value chain will provide greater flexibility and better pricing for its upstream plantation business. Maintain BUY. Our FV on SOP is RM7.03, based on 13.0x FY12 PER. The company has a strong production growth potential and sound management. The following pages provide details of our visit experience and further elaborate our views on the company. FYE Dec (RMm) FY08 FY09 FY10 FY11f FY12f Revenue 683.5 533.3 725.4 1040.8 2161.0 Net Profit 143.1 100.0 147.2 263.3 235.1 % chg y-o-y 35.6 -30.1 47.1 78.9 -10.7 Consensus - - - 254.0 207.0 EPS (sen) 36.9 23.4 34.3 60.8 54.3 DPS (sen) 3.0 3.0 4.0 6.1 5.4 Dividend yield (%) 0.5 0.5 0.6 1.0 0.9 ROE (%) 24.0 12.8 16.3 24.2 18.0 ROA (%) 13.2 7.5 9.6 14.7 10.6 PER (x) 17.2 27.2 18.5 10.4 11.7 BV/share 1.89 1.93 2.23 2.76 3.2 P/BV (x) 3.4 3.3 2.8 2.3 2.0 EV/EBITDA (x) 9.8 13.7 9.1 5.5 5.8 PLANTATION Sarawak Oil Palm is primilary involved in oil palm plantation, with all its production area based in the state of Sarawak Stock Statistics Bloomberg Ticker SOP MK Share Capital (m) 434.9 Market Cap 2,761.9 52 week H | L Price 6.45 3.20 3mth Avg Vol (000) 403.6 YTD Returns 13.6 Beta (x) 0.79 Shariah Compliant YES Major Shareholders (%) Shin Yang Group 36.3 PELITA Holdings 28.7 Share Performance (%) Month Absolute Relative 1m 2.7 2.5 3m 39.1 25.0 6m 46.3 42.5 12m 65.1 63.1 6-month Share Price Performance 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Investment Research Daily BUY Price RM6.35 Fair Value RM7.03 Previous RM7.03 Gan Jian Bo +60 (3) 9207 7621 [email protected]
Transcript of Sarawak Oil Palms
PP10551/07/2012 (030567)
22 Feb 2012
OSK Research | See important disclosures at the end of this report
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MALAYSIA EQUITY
Company Update
Sarawak Oil Palms First Among Equals We flew into Miri, Sarawak recently to meet up with Sarawak Oil Palms (SOP)
management who brought us around its plantations. We liked what we saw during
the trip, reinforcing our view that SOP is a well-run company with management
competence rare for a plantation company its size. Coupled with one of the best
tree age profiles in the industry, SOP is among our favourite plantation picks. Its
new downstream venture will commence operations in April, thus removing its
dependence on third-party refiners and providing SOP with closer access to end
consumers. Maintain BUY with FV of RM7.03.
Heading East. We recently organized a 2-day trip to visit SOP’s oil palm operations.
Despite the occasional rain (we were forewarned of the potentially damp weather), we
managed to explore the company’s mineral soil plantation, 9-metre-deep peat soil oil
palm estate and one of the world’s largest palm oil mill. We also toured Shin Yang’s
plywood manufacturing facility and shipbuilding yard (and had an ex-general lead us on
board his navy landing craft currently under construction).
The peat specialist. One may be wondering how SOP was actually able to achieve
commendable yields when more than half of its estates are on peat. The visit gave us
an opportunity to gain an insight into its operations and basically reaffirms our view that
the company’s management knows how to get the best out of peat soil – a soil type that
has hampered the success of many planters.
One of the youngest in town. With 33% of its trees still immature and 77% of its trees
below peak production age, SOP has one of the best tree age profiles among
companies within our plantation universe. At 820,997 tonnes, FY11 FFB production
growth came in at 22%. We expect FY12 production growth to still be in the high teens
at 17%.
Refinery slated for April. SOP’s 1,500 tonne-per-day refinery, which will be able to
accommodate all of its CPO production, is coming on stream in two months and thus,
eliminating its dependence on other refiners like Wilmar. While the Malaysian refining
landscape appears challenging relative to that of Indonesia, a more integrated value
chain will provide greater flexibility and better pricing for its upstream plantation
business.
Maintain BUY. Our FV on SOP is RM7.03, based on 13.0x FY12 PER. The company
has a strong production growth potential and sound management. The following pages
provide details of our visit experience and further elaborate our views on the company.
FYE Dec (RMm) FY08 FY09 FY10 FY11f FY12f
Revenue 683.5 533.3 725.4 1040.8 2161.0
Net Profit 143.1 100.0 147.2 263.3 235.1
% chg y-o-y 35.6 -30.1 47.1 78.9 -10.7
Consensus - - - 254.0 207.0
EPS (sen) 36.9 23.4 34.3 60.8 54.3
DPS (sen) 3.0 3.0 4.0 6.1 5.4
Dividend yield (%) 0.5 0.5 0.6 1.0 0.9
ROE (%) 24.0 12.8 16.3 24.2 18.0
ROA (%) 13.2 7.5 9.6 14.7 10.6
PER (x) 17.2 27.2 18.5 10.4 11.7
BV/share 1.89 1.93 2.23 2.76 3.2
P/BV (x) 3.4 3.3 2.8 2.3 2.0
EV/EBITDA (x) 9.8 13.7 9.1 5.5 5.8
PLANTATION
Sarawak Oil Palm is primilary involved in oil
palm plantation, with all its production area
based in the state of Sarawak
Stock Statistics
Bloomberg Ticker SOP MK
Share Capital (m) 434.9
Market Cap 2,761.9
52 week H | L Price 6.45 3.20
3mth Avg Vol (000) 403.6
YTD Returns 13.6
Beta (x) 0.79
Shariah Compliant YES
Major Shareholders (%)
Shin Yang Group 36.3
PELITA Holdings 28.7
Share Performance (%)
Month Absolute Relative 1m 2.7 2.5
3m 39.1 25.0
6m 46.3 42.5
12m 65.1 63.1
6-month Share Price Performance
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12
Investment Research
Daily
BUY
Price RM6.35
Fair Value RM7.03
Previous RM7.03
Gan Jian Bo
+60 (3) 9207 7621
OSK Research
OSK Research | See important disclosures at the end of this report
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THE ROAD TRIP
Palms as tall as coconut trees. Upon touchdown on the island of Borneo, we kicked off our trip by visiting
SOP’s Lambir operations – an oil palm complex comprising oil palm estates, a palm oil mill and a training
academy. Measuring some 4,221 ha, this mineral soil estate represents approximately 7% of SOP’s total 62k
ha planted area. This estate has oil palm trees as tall as coconut trees and as old as 27 years that were
yielding more than 20 FFB tonnes per ha. The company has a general benchmark of replanting old trees
once their yields go under the 18 tonnes per ha mark. For those planted on mineral soil, trees above 10 years
old have generated yields averaging 25 tonnes in 2011. We arrived a little too late in the day to witness actual
FFB harvesting but did manage to try our hands at canopy pruning (which admittedly looks easier than it
actually is).
Figure 1: SOP’s operations are located solely in Sarawak
Source: Company
Getting the most out of the fruits. SOP’s Lambir palm oil mill, a 120 tonne-per-hour mill and one of the
world’s largest, processes FFBs harvested from both its own plantations and third-party estates. We were
guided along the whole milling cycle, from FFB sterilization, FFB threshing to separating the fruits from the
bunch, and the oil extraction process. We learned that the quality of the milling process can be easily
inspected by examining the squeezed fruit mesocarp fibre’s moisture content. The drier the fibre, the better
the oil extraction process. The ultimate goal of a mill is to extract as much oil as possible from the mesocar,p
while preserving the palm kernel in its whole form for subsequent crushing. (see Figures 2 to 5 for pictures
from the palm oil mill visit)
Figure 2: SOP’s palm oil mill Figure 3: Fresh fruit bunches
Source: Company, OSK Research
Source: Company, OSK Research
EstatesCPO MillsCPO Mills (Planned)Refinery & KCP
Visit Location: Miri
OSK Research
OSK Research | See important disclosures at the end of this report
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Figure 4: FFB sterilizer Figure 5: Dry mesocarp after oil extraction
Source: Company, OSK Research
Source: Company, OSK Research
The leaning palms. After a bumpy road journey resembling a mild theme park ride, we reached the most
anticipated leg of the trip – a tour of SOP’s peat soil oil palm estate. 65% of SOP’s estates are on peat, a soil
type where many companies have failed to obtain good yields from. A common mistake by practitioners
would be to overdrain the peat, causing the soil to lose its sponginess and ability to retain moisture. Water
management is key to maintaining water at levels high enough for water absorption by the palms, yet low
enough to ensure a certain firmness of the ground and to prevent flooding. Lighter vehicles with wider tire
bases are used in the estate due to the ground’s softness (which we were able to feel once we stepped on
the 9-metre-deep peat estate). Thanks to an initial tree density that is higher than that on mineral soil as well
as proper water and pest management, the company is able to target FFB yields above 26 tonnes per ha for
its fully mature peat estates. (see Figures 6 to 8 for pictures taken during the peat estate visit)
Moving closer to the plate. SOP first decided to venture into the downstream business in 2009 and will have
its 1,500 tonne-per-day refinery and 500 tonne-per-day kernel crushing plant up and running in April 2012.
Despite concerns on the competitiveness of Malaysian refineries relative to that of their Indonesian
counterparts, management has emphasized its intention to move closer to end consumers. While refining
margins are thin (and sometimes negative), we believe downstream exposure will have spillover benefits for
SOP’s upstream operations. The state of Sarawak currently has a shortage of refining capacity, which from
our understanding, has led to less than optimal pricing for CPO producers without their own refineries. A
similar case can be drawn in the milling stage, where planters who are facing difficulties finding a mill for their
FFBs due to insufficient milling capacity. Such planters may see their fruits processed later than the preferred
timeframe of 24-hours-after-harvesting, hence leading to higher free fatty acids content and lower pricing.
Thus, we think that a more integrated value chain will provide greater flexibility and better pricing for its
upstream operations.
Figure 6: Sluice gate to control water levels Figure 7: Male flowers
Source: Company, OSK Research
Source: Company, OSK Research
OSK Research
OSK Research | See important disclosures at the end of this report
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Figure 8: SOP’s 9-metre-deep peat estate. The drainage system is used to manage water
levels. Note the leaning oil palm trees are caused by the soil’s softness.
Source: Company, OSK Research
OSK Research
OSK Research | See important disclosures at the end of this report
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FYE Dec FY08 FY09 FY10 FY11f FY12f
Turnover 683.5 533.3 725.4 1040.8 2161.0
EBITDA 251.3 178.9 269.7 447.0 420.2 PBT 211.1 134.8 219.6 385.9 344.5 Net Profit 143.1 100.0 147.2 263.3 235.1 EPS (sen) 36.9 23.4 34.3 60.8 54.3 DPS (sen) 3.0 3.0 3.4 6.1 5.4 Margin EBITDA (%) 36.8 33.5 37.2 43.0 19.4 PBT (%) 30.9 25.3 30.3 37.1 15.9 Net Profit (%) 20.9 18.8 20.3 25.3 10.9
ROE (%) 24.0 12.8 16.3 24.2 18.0 ROA (%) 13.2 7.5 9.6 14.7 10.6 Balance Sheet Fixed Assets 866.8 1017.7 1184.9 1387.6 1597.8 Current Assets 396.9 395.6 478.8 535.5 918.3 Total Assets 1263.7 1413.3 1663.7 1923.2 2516.1 Current Liabilities 181.9 163.1 193.8 203.5 532.6 Net Current Assets 215.0 232.5 285.1 332.0 385.8 LT Liabilities 264.4 326.7 373.1 388.1 417.1 Shareholders Funds 736.1 828.8 974.3 1198.3 1409.9 Net Gearing (%) net cash net cash net cash net cash net cash
EARNINGS FORECAST
OSK Research
OSK Research Guide to Investment Ratings
Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated (NR): Stock is not within regular research coverage
All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned.
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