The group’s minimal forward sales have been minimal so far with only 6,000 tonnes sold at around RM3,800per tonne early this year 

By ANIS HAZIM / Source sop.com.my

SARAWAK Oil Palms Bhd is expected to fare well with its minimal forward sales approach in this high-priced environment while its downstream expansion provides growth impetus. 

RHB Investment Bank Bhd’s analyst Hoe Lee Leng noted the group’s minimal forward sales have been minimal so far with only 6,000 tonnes sold at around RM3,800 per tonne early this year. 

“Management is of the view prices would remain elevated in the first half of 2022 (1H22), followed by a decline in 2H22 if cropping patterns improve and if there is any change in biodiesel mandates globally,” Hoe wrote in a research note on Sarawak Oil Palms yesterday. 

As such, the analyst viewed the Sarawak-based planter is not participating in any forward sales at the moment but may change its stand in the latter part of the year. 

For financial year 2022 (FY22), Sarawak Oil Palms’ management is guiding for flat year-on-year (YoY) growth in production of fresh fruit bunch (FFB) despite a 30% to 35% labour shortage and lower January 2022 output of 11.8% YoY.

This optimistic production view is due to the black bunch count conducted recently and the improved weather in March. 

“In terms of labour shortage, Sarawak Oil Palms is hoping Malaysia will ink the government-to-government agreement with Indonesia soon which will enable it to start recruiting workers once borders reopen on April 1,” Hoe added. 

Sarawak Oil Palms also hoped the state government will start allowing workers from Bangladesh 

to come in soon as the test batch of Bangladeshi workers had worked out well so far, according to Hoe. 

Given the flat guidance, RHB Investment trimmed Sarawak Oil Palms’ FFB growth assumptions to 0.5% to 6% for FY22 to FY24 from 1.3% to 5.1% respectively. 

The report estimated Sarawak Oil Palms’ production costs will rise 10%-15% YoY in FY22 on the back of higher fertiliser costs. 

Notably, Sarawak Oil Palms has only completed 75% of its fertiliser application in 2021 and it is able to use the unutilised fertiliser in 1H22. 

Together with the lower-priced unutilised 2021 fertiliser, Sarawak Oil Palms’ 1H22 fertiliser costs are expected to rise 50% YoY, the investment bank estimated. 

Hoe noted Sarawak Oil Palms has yet to tender for its 2H22 fertiliser requirements. 

“It recorded unit costs of RM1,500 to RM1,600 per tonne in FY21 (including kernel credit of RM400 to RM450 per tonne). We have imputed a 15% increase in unit costs for FY22F to be more conservative,” she added. 

Concurrently, the volatile edible oil prices have been good for Sarawak Oil Palms’ downstream margins with its refining division performing well in FY21, although no breakdown is given. 

“This was achieved in a rising price environment, where feed-stock bought, processed and sold one to two months later garnered a higher average selling price, resulting in margin expansion,” she said. 

Sarawak Oil Palms is expanding its refinery capacity by 53% to 2,300 tonnes per day at RM40 million as the utilisation rate remains close to 90%. 

This will be completed in the 2H22 and will produce higher quality, tailored products for its customers. 

“We have imputed this expansion into our forecasts,” she stated. 

RHB Investment has reiterated its ‘Buy’ call on Sarawak Oil Palms with a lower target price of RM6.05 (from RM6.35) based on an unchanged eight times 2022F price earning (PE) after revising its FY22- 24F earnings by -4.6% to +2.5%. 

“Sarawak Oil Palms’ valuation remains attractive as the stock is trading at six times FY22F PE, which is at the low end of its peer range of six to 10 times. 

“Our TP imputed a 16% environmental, social and governance (ESG) discount based on our in-house proprietary methodology to account for the group’s ESG score of 2.22,” the analyst further stated.