Sarawak Oil Palms Berhad (SOP) posted a strong performance in its second quarter of 2024, with core profit after tax and minority interest (PATMI) surpassing expectations. The company's earnings were bolstered by improved average selling prices (ASP) and increased fresh fruit bunch (FFB) production, while lower unit costs further contributed to the positive results. Despite this strong performance, analysts anticipate a softer second half of the year due to expected lower ASPs and higher costs. SOP is currently valued attractively at 4.4 times its FY24 estimated price-to-earnings ratio (PER) after excluding its net cash position.

Maybank and RHB broking houses have maintained a positive outlook on SOP, with recommendations to BUY. Analysts from different banks have adjusted their target prices upward, reflecting their confidence in the company's prospects. A higher target price of RM4.10 was set, representing a 49% potential upside. Another analyst increased its target price to RM3.60, predicting a 28% return. The company's earnings for the first half of 2024 have already met a significant portion of full-year forecasts, supporting the optimism for its future performance.

For the second quarter of 2024, SOP's core PATMI reached RM104 million, marking a 133% year-on-year increase and a 34% rise quarter-on-quarter. This brought the company's core PATMI for the first half of the year to RM181 million, almost doubling the figures from the same period last year. The earnings growth was driven by a combination of higher FFB output, which increased by 11% year-on-year, and a 5% year-on-year increase in palm oil products' ASP. Additionally, the company managed to reduce its all-in operating cost of production to RM1,980 per tonne, a 28% decrease from the previous year.

SOP's downstream segment also showed improvement, with management guiding that the segment remained profitable in the second quarter, and expectations are set for continued positive performance throughout the year. The company's second refinery, which produces higher quality oils, is expected to sustain this trend, despite competitive pressures from Indonesian players with advantageous tax structures. SOP's refining utilisation rate is projected to remain robust at 75%.

Looking ahead, SOP's production outlook remains solid, with a projected full-year FFB output growth of 8%, adjusted slightly upward from previous estimates. Despite potential weather-related challenges, the company's fertiliser application is expected to stay on track, which should help maintain lower unit costs. SOP also declared an interim dividend of 4 sen per share, representing a 19% payout ratio, underlining its strong cash position and commitment to returning value to shareholders.

Source: Maybank, RHB
Title: Another sequential beat, Undervalued Performer; Maintain BUY