KUALA LUMPUR: Sarawak Oil Palms Bhd's earnings outlook remains bright, backed by its solid fresh fruit bunch (FFB) growth and lower production cost, albeit offset by lower margins from the downstream segment.
RHB Research said Sarawak Oil Palms recorded a solid year-to-date August FFB growth of 8.0 per cent year on year (YoY), in line with the firm assumptions, thanks to its relatively young age profile.
Although Miri saw heavy rains over the past month, the firm said management gave its reassurance that it has normalised and has minimal impact on productivity.
"Despite this, Sarawak Oil Palms is maintaining its financial year 2024 (FY24) FFB growth target at 5-6 per cent, as peak production (September/October) is coming in slightly lower than expected, and it is anticipating growth to be slightly moderate.
"As such, we cut our FFB production growth slightly to seven per cent for FY24 from eight per cent but increase our FFB growth for FY25 to FY26 to 6 per cent and 6 per cent from 4 per cent and 3 per cent," it said in a note.
Meanwhile, RHB Research said competition in the downstream segment is likely to intensify.
Despite challenges from India's import tax hike on refined products, it said the management remains hopeful for a similar outlook in the second half of 2024 (2H24), driven by higher utilisation from both refineries and better product mix.
"However, given the recent restructuring of tax policy in Indonesia, which widens the edge downstream players have over Malaysian players, we believe competition may intensify in 2H24.
"As such, we keep our utilisation rate assumptions at 75 per cent for FY24F-FY26 to be conservative but lower the margin assumptions to 2.5 per cent, three per cent and three per cent from 3.5 per cent," it said.
Overall, RHB Research trimmed its FY24 earnings by 6 per cent but raised FY25 to FY26 earnings by one per cent and four per cent after adjusting for FFB production growth, production cost, and downstream margins.
"We maintain our target price of RM3.60 and keep Buy on the stock," it added.