Sarawak Plantation Bhd
(Oct 29, RM1.46)
Initiate coverage with outperform and a target price (TP) of RM2.06: Sarawak Plantation Bhd has been staying under the radar for years but we believe it is turning around, thanks to the guidance of Ta Ann Holdings Bhd, which emerged as the largest shareholder of the company last year. We think ongoing transformation plans carried out by Ta Ann’s management team will help to deliver positive results in the form of higher productivity and efficiency in financial year 2020 (FY20). We initiate coverage of Sarawak Plantation with an “outperform” call and a TP of RM2.06. Our valuation is derived from 19 times FY20 price-earnings ratio (PER), a 12% premium to Ta Ann’s plantation valuation given Sarawak Plantation’s explosive fresh fruit bunch (FFB) production growth in the near term, implying a 41% upside to its current share price.

Sarawak Plantation, founded in 1997, is mainly involved in the pure upstream oil palm plantation business. It owns a total land bank of 46,248ha along the Miri-Bintulu highway and the Sibu-Mukah road in Sarawak, of which 78% has been developed into oil palm estates. In terms of age profile, about 34% is below six years old, 46% is under the prime mature category and only 20% is in the old age category (over 20 years old). Its average age profile stands at 12 years old. The group derives the bulk of its income from crude palm oil (CPO) and palm kernel sales, which accounted for almost 99% of its FY18 sales.

Since becoming the controlling shareholder of Sarawak Plantation, the main priority of Ta Ann’s management is to increase productivity as a whole. It places focus on automation and mechanisation of the mill and estate operations respectively, smoothening the processes to further streamline the operations. It is also sharing its expertise and knowledge of water control systems and planting terrain as its strength lies in peat soil planting. It has brought in new machineries to improve productivity of mineral land plantations. The results were proven by the 4.7% FFB production growth last year and 20% in the first nine months of this year.

Based on our CPO price assumption of RM2,200 to RM2,400 per tonne and FFB production growth forecasts of 10%-20% per annum for FY19-FY21, we project double-digit earnings growth of 13%-85% per annum for the next three years. The bumper increase in FFB production would be timely to capture the uptrend in CPO prices. As no significant capital expenditure is needed in the near term, we believe the management could announce a generous dividend payout for the following years. For the first half of FY19, a dividend per share of five sen was declared.

At Sarawak Plantation’s current share price of RM1.46, investors enjoy a lower entry price than Ta Ann’s, which is over RM2 per share. Sarawak Plantation is also trading at a 24% discount to its net book value of RM1.91 per share. Valuation-wise, we think the current forecast FY20 PER of 14.5 times (a 56% discount to the historical three-year mean) is unwarranted, making it one of the cheapest plantation stocks. — PublicInvest Research, Oct 31