Sarawak Oil Palms to gain from CPO price uptrend

The oil palm grower is guiding for RM220m in capex for FY21 for new refining capacity and biodiesel plant expansion


SARAWAK Oil Palms Bhd (SOPB) is expected to gain from the crude palm oil (CPO) price uptrend and better contributions from its downstream expansion plan, according to RHB Investment Bank Bhd (RHB Research).

The bank has maintained its ‘Buy’ call on SOPB raising its target price to RM5.40 from RM4.85 previously.

RHB Research analyst Hoe Lee Leng attributed the call to SOPB’s sensitivity to the continuous CPO price rally and its improved downstream income.

She said SOPB could not realise full production potential as year-to-date (YTD) November 2020 fresh fruit bunch (FFB) output rose by 1.9% year-on-year (YoY), as it was affected by floods from August to September last year, and foreign hiring restrictions that led to a labour shortage.

“While current weather patterns are manageable without any major floods, management remains cautious on labour workforce uncertainties and expects a conservative 3% to 5% FFB growth for financial year 2021 forecast (FY21F). We tweak our assumptions between 1% and 4% growth for FY20 to FY21,” she stated in a research note yesterday.

Hoe added that SOPB’s labour shortage is about 15%-20% from the usual 10%. However, the management does not expect current shortages to affect operations significantly as the peak season is over.

The Sarawak state government has allowed employers to resume hiring foreign labour from Jan 1 onwards, while the company remains active in introducing retention incentives for workers.

Hoe also said SOPB’s biodiesel plant is back operating at almost maximum capacity, as B20 biodiesel has been primarily rolled out in Sarawak since September last year.

Similarly, its refineries continue to operate at maximum capacity in response to demand from key markets like India and Europe.

Its trading profits doubled YoY in the first nine months of last year (9M20).

“SOPB is guiding for RM220 million in capital expenditure (capex) for FY21, which comprises new refining capacity of 800 tonnes per day to be completed in the third quarter of 2021 (3Q21) and extra 300 tonnes per day for its biodiesel plant expansion which was completed by end-2020, on top of the usual upstream maintenance.

“We revised FY20 to FY22 earnings forecast by 4%-13%, to account for higher capex projections and lower-cost assumptions, offset slightly by lower FFB estimates,” she stated.

Hoe expects the company to have modest forward sales as it locked in 30% of its production for 4Q20 while committing about 20% of output for the first half of 2021, adding that SOPB has since stopped forward sales temporarily, preferring to wait to see price trends first.

Cost reduction ahead, SOPB expects production cost including palm kernel credit to narrow in FY21, targeting RM1,500 per tonne from 9M20 of RM1,600 per tonne on the back of higher yield per hectare and cost savings, Hoe added.

Read our earlier report


CPO to sustain bullish run on pent-up demand