Strong production, appealing valuations support Sarawak Oil Palms

KUCHING (Oct 9): Analysts RHB Investment Bank Bhd (RHB Research) remain upbeat on Sarawak Oil Palms Bhd’s (Sarawak Oil Palms) earnings prospects for its financial years 2024 (FY24) to FY26.

This is backed by its solid fresh fruit bunch (FFB) growth and lower production cost, albeit offset by lower margins from its downstream segment.

“Year to date, Sarawak Oil Palms recorded solid FFB growth at eight per cent year on year (y-o-y) up to August 2024, in line with our assumptions, thanks to its relatively young age profile,” it said in a report.

Although Miri saw heavy rains over the past month, the Sarawak-based planter gave its reassurance that it has normalised and has minimal impact on productivity.

Despite this, Sarawak Oil Palms is maintaining its FY24 FFB growth target at five to six per cent, as peak production — which is during September and October — is coming in slightly lower than expected, and it is anticipating growth to slightly moderate.

“As such, we cut our FFB production growth slightly to seven per cent y-o-y for FY24 (from eight per cent) but increased our FFB growth for FY25 to FY26 to six per cent and six per cent, from four per cent and three per cent respectively.”

Meanwhile, crude palm oil (CPO) cost of production for the first half of 2024 (1H24) came in at roughly RM2,000 per tonne including palm kernel credit versus 1H23 at RM2,050 per tonne.

For FY24, management anticipates costs to decline by three to six per cent y-o-y, led by lower fertiliser costs and higher-than- average output.

“We keep our cost expectations for FY24 but adjust FY25 to FY26 by minus three per cent versus our initial flattish assumptions to reflect the solid production growth.

“Note that Sarawak Oil Palms has applied 85 per cent of 1H24 requirements and expects to remain on track in 2H24.”

RHB Research forewarned that competition in the palm oil downstream segment is likely to intensify.

“Although no disclosure on contributions, Sarawak Oil Palms guided that the downstream segment improved quarterly in its second quarter of 2024 to positive levels thanks to more favourable pricing mix and higher trading contribution.

“Despite challenges from India’s import tax hike on refined products, management remains hopeful for a similar outlook in 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.”