KUALA LUMPUR: RHB Research continues to like Sarawak Oil Palms Bhd (SOP) for its sensitivity to the crude palm oil (CPO) price uptrend.
The company would also benefit from better contributions from its downstream expansion plan, RHB Research said.
The firm has maintained its "Buy" rating on SOP with a higher target price (TP) of RM5.40.
"Our TP implies an enterprise value per hectare (EV/ha) of US$9,000, which is at the low end of its peer range. SOP is still trading below its global financial crisis through price per book value (P/BV) of 1.1 times," RHB Research said in a report today.
SOP's year-to-date (YTD) November 2020 fresh fruit bunches (FFB) output rose by 1.9 per cent, being affected by floods last August-September and foreign hiring restrictions that led to a more pronounced labour shortage.
"While current weather patterns are manageable without any major floods, the management remains cautious on labour workforce uncertainties and expects a conservative 3-5 per cent FFB growth for FY21 forecast.
"We tweak our assumptions to 1-4 per cent growth for FY 20-21 forecast," it said.
RHB Research said SOP's biodiesel plant was back to operating at almost maximum capacity, as B20 had been largely rolled out in Sarawak since September 2020.
Similarly, its refineries continue to operate at maximum capacity, in response to the demand recovery from key markets like India and Europe, while trading profits doubled year on year (yoy) in nine month 2020.
"SOP is guiding for RM220 million in capex for financial year 2021 (FY21), which comprises new refining capacity of 800 tonnes per day (to be completed in third quarter 2021 (Q3 2021) and extra 300 tonnes per day for its biodiesel plant expansion (completed by end-2020), on top of the usual upstream maintenance," it said.
The firm said SOP had locked in 30 per cent of its production for fourth quarter 2020, while committing about 20 per cent of output for the first half of 2021 (1H21).
It has since stopped forward sales for the time being, preferring to wait to see price trends first.
"The management expects production cost (including palm kernel credit) to narrow in FY21, targeting RM1,500 pervtonne (from 9M20 RM1,600 perbtonne) on the back of higher yield/ha and cost savings.
"We revise financial year 2020-2022 earnings forecasts by 4.0-13 per cent, to account for higher capex projections and lower cost assumptions. This is offset slightly by lower FFB estimates," it added.