Plenty of room for growth at SOP

Sarawak Oil Palm Bhd (March 16, RM3.34) Upgrade to buy at RM3.30 with target price RM4.07: We met Sarawak Oil Palm’s (SOP) management recently, who said SOP is committed to improve production by adopting operating efficiency standards, including making continuous estate inspections and ensuring that fertiliser is evenly applied. Large immature areas will sustain SOP’s future growth. Currently, SOP has 26,548ha of immature areas which account for almost 45% of total planted areas. SOP is expected to register double digit fresh fruit bunch (FFB) production growth as 3,700ha which was planted in 2007 will start to bear fruit in FY11. We believe that SOP’s growth (in terms of FFB production) will accelerate in the future as the young trees and immature areas gradually reach maturity. SOP will progressively develop its 12,000ha of unplanted areas. The management does not have any new planting policy, but it is expecting to plant 5,000ha to 6,000ha annually. Therefore, the landbank will be fully exhausted by 2013. Management is continuously looking for new land, since more than 1.5 million hectares of land is available for palm oil cultivation in Sarawak. In addition, the government has approved more than 720,000ha of Native Customary Rights (NCR) land for plantation projects. Total capital expenditure is estimated at RM560 million in FY11. SOP is expected to build two mills and a refinery which are targeted to be in operation by FY12 and FY13. We are upgrading our recommendation for SOP to “buy” (from “neutral”) as the recent share price retracement has triggered our “buy” threshold. SOP’s steady earnings growth will be supported by: (i) large immature and young trees which account for more than 75% of total planted areas; (ii) improving FFB yield; and (iii) higher production as more trees gradually reach maturity. We maintain our target price at RM4.07, derived at 11.3 times 2011 earnings per share, which is one standard deviation above its five-year historical price-earnings ratio (PER) of 8.9 times. SOP is currently trading at 8.9 times forward PER, which is a 23% discount to the weighted average market PER of 11.5 times. — MIDF Research, March 16