Saturday, November 26, 2011

Sarawak Oil Palms Bhd (RM4.66; TP: RM5.80): Results in-line

SOP achieved a net profit of RM75.14mil in 3Q2011, an increase of 52.1% yoy and 7.4% qoq. 9M2011 net profit rose to RM199.6mil, an increase of 94.2% yoy. However, profit before tax in 3Q2011 dropped qoq to RM103.8mil from RM112mil in 2Q2011 as palm oil production growth could not offset the drop in palm oil prices. Net cash stood at RM104mil. Going forward, 4Q2011 might retain the same performance or a marginal drop in profits owing to slightly lower production (judging from its historical production in 4Q vs 3Q), assuming palm oil prices remain at RM3,000/MT.

Net profit is on track to reach about RM270-280mil in the whole year of 2011, equivalent to EPS of 62.2 sen to 64.5 sen. It is currently trading at PER 2011 of 7.2-7.5x which remains undemanding. PBV is at 1.48x. Fair value maintained at RM5.80 per share, an upside of 24.5%. Over the past 2 weeks, its share price remained very resilient supported by very strong buying power, despite the drop in the overall market over the few weeks. It’s a stock worth putting in your portfolio over the long term. Strong earnings growth would come from its young tree age profile as 43% of its immature trees mature over the next few years.

Market Data:
Share price: RM4.66
Shares issued: 434.146mil
Market Cap: RM2,023mil
PER 2011: 7.2-7.5x
PBV: 1.48x


  1. David, out of all the plantation stocks you have written, I will chose TDM due to its low valuation, far lower than all of others in whatever metric you use. The second will be SOP because of its high growth,, high ROE and ROIC, both at 21%. THP equals SOP in these measures, but better in term of cash flows. TWSP also good, high in growth and valuation also attractive, but low in ROIC (13% only), probably because of its high invested capital and higher debts. TSH is the worst in all aspects, but you know what, it provides the best return of 36% since January 1 2011! Surprise, surprise! Why do you think so?

  2. Coverage by analysts, investors buying into their growth story eg. high yield (30MT/ha!!; industry average about 20MT/ha), large plantation landbank, more trees coming to maturity next year etc. And better liquidity. It is more liquid than the stocks I feature here, funds are more willing to go into liquid stocks like IJMP and TSH. My humble opinion :)

  3. David, you are right. TSH has an impressive growth story propagated by many analysts. The growth story has to be exceptional because at 3.96, its valuation in terms of PE ratio, TEV/Ebitda, TEV/CFFO etc are way above all its peers by a large margin. But is its exceptional growth story plausible? A look at its ttm results shows the contrary. For example, its ttm growth in revenue is only 29% compared to 46% of SOP and q-q, TSH's revenue contracted by 17% compared to growth of 13% of SOP. One would expect TSH's gross margin would be very high with its claim of high yield production. Its ttm gross margin is only 26%, less than half that of THP of 52%, and also much less than other plantation companies. Buying stock at high valuation in anticipation of high growth which often does not materialize results in a double whammy. I admit that I am wrong about the market on TSH but I believe what Warren Buffet has said, "in the short-term, the market is a voting machine, but in the long-term, it is a weighing machine".

  4. Thanks for sharing, K C. Totally agree :)