KUALA LUMPUR (Jan 6): RHB Research has maintained its "buy" call for Sarawak Oil Palms Bhd at RM4 with a higher target price of RM5.40 (from RM4.85), on the back of the stock's sensitivity to the crude palm oil (CPO) price uptrend and better contributions from its downstream expansion plan.

In a note today, RHB Research's analyst Hoe Lee said the target price of Sarawak Oil Palms was raised based on 16 times FY21F price-to-earnings, in line with that of its small-cap peer average which implies US$9,000 enterprise value over hectare (EV/ha) is at the low end of its peer range. Sarawak Oil Palms is still trading below its Global Financial Crisis trough price-to-book value of 1.1 times.

“We continue to like Sarawak Oil Palms, for its sensitivity to the CPO [Crude Palm Oil] price uptrend and better contributions from its downstream expansion plan. It is trading at an attractive 12 times FY21F price-to-earnings, vs peers’ 11-18 times,” she said.

Hoe noted that Sarawak Oil Palms was unable to realise full production potential as year-to-date November 2020 fresh fruit bunch output rose by 1.9% year-over-year, being affected by floods in August to September last year, and foreign hiring restrictions that led to a more pronounced labour shortage of about 15-20% (vs the usual 10%).

“While current weather patterns are manageable without any major floods, management remains cautious on labour workforce uncertainties and expects a conservative 3-5% fresh fruit bunch growth for FY21F. We tweak our assumptions to 1-4% growth for FY20-21F,” she explained.

Hoe said Sarawak Oil Palms is guiding for RM220 million in capex for FY21, which comprises new refining capacity of 800 tonnes/day (to be completed in 3Q21) and extra 300 tonnes/day for its biodiesel plant expansion (completed by end-2020), on top of the usual upstream maintenance — she revised FY20-22 earnings forecasts by 4-13%.

Hoe also pointed out that Sarawak Oil Palms will have modest forward sales as the planter has locked in 30% of its production for 4Q20, while committing about 20% of output for 1H21.

Preferably, Sarawak Oil Palms waits to see price trends first as the company has stopped forward sales for the time being, said Hoe.

“Management expects production cost (including PK credit) to narrow in FY21, targeting RM1,500/tonne (from 9M20 RM1,600/tonne) on the back of higher yield/ha and cost savings,” said Hoe, referring to Sarawak Oil Palms’ cost reduction plan.

At 10.37am, Sarawak Oil Palms added 1.5% or 6 sen to RM4.06, giving it a market capitalisation of RM2.32 billion.