PROPELLING GROWTH: SOP enjoys home ground advantage in securing more plantation land in Sarawak as the state has another one million hectares of land earmarked for development.
KUCHING: Malaysia’s seventh largest listed plantation company (by planted area), Sarawak Oil Palms Bhd (SOP) is diversifying into downstream manufacturing to capture refining margins and diversify its earnings base from just a pure upstream player.
According to Maybank Investment Bank Bhd (Maybank IB) senior analyst Ong Chee Ting, SOP registered figures to make heads turn. The company accelerated its new planting programme over the last five years by doubling planted oil palm estates from 29,982 hectares (ha) to 58,940ha.
Given the aggressive new planting in recent years and an average age profile at 7.5 years, 25,063ha of its planted oil palm estates was immature while 20,003ha is young matured. “Such a young profile promises explosive production growth in the immediate and medium term,” Ong pointed out.
Oil palm tress grown on peat lands were generally perceived to generate poorer yield. However, SOP had proven otherwise given approximately 65 per cent of its planted area is on peat soil. The research firm believed SOP’s average fresh fruit bunch (FFB) yield of 19.9 tonne per ha per year was commendable as the average tree age profile is merely 7.5 years.
In fact, it was yielding just as good as some players who had peaked in terms of age profile, it added.
As at June 2011, SOP had planted close to 62,000 ha of oil palm estates. It had another 2,000ha to 3,000ha of plantable reserves. “Yet, we believe SOP had the ability to source for new sizeable landbank for its expansion. Its track record speaks for its ability to secure new landbank as it has, over the last decade, acquired 35,854 ha of greenfield land to ensure constant supply of land to meet its expansion target,” said Ong.
Internally, SOP planned to continue its aggressive land banking strategy. It strategically timed its milling capacity expansion in line with its FFB production growth, which was vital to avoid excessive unutilised capacity.
With three new mills built and capacity expanded on one mill during the past five years, SOP managed to sustain 70 per cent average utilisation rate. The company currently has four palm oil mills in Sarawak with a combined annual capacity of 1.7 million tonnes, Maybank IB estimated.“In addition to that, a new 60 tonne per hour mill in Bintulu is expected to be completed by the first half of 2012. Meanwhile, the construction for another 90 tonne per hour mill will begin during the second half of 2011.”
SOP’s oil palm estates were mainly located along the main ‘Trans Borneo Highway’ link from Miri to Bintulu and Mukah to Bintulu, and the coastline. The geographical advantage enabled convenient access to infrastructure, cost savings from lower transportation cost as well as efficient estates management.
Presently, 100 per cent of SOP’s estates are located in Sarawak given the vast amount of opportunities there and its relatively cheaper entry as greenfield land prices in Peninsular Malaysia and Sabah had exceeded RM10,000 per ha. Sarawak, on the other hand, still offers reasonable prices of RM6,000 to RM8,000 per ha.
“With the vast landbank available in Sarawak and government’s efforts to spur agricultural development in the state, areas planted with oil palm in Sarawak has grown by a 10-year compounded annual growth rate (CAGR) of 11 per cent,” Ong pointed out. “This is the highest when compared with the Peninsular, Sabah and also Indonesia over the last 10 years.”
Maybank IB also stated that the pace of growth was expected to sustain over the next decade as the state government had vowed to double the oil palm planted area in the state to two million ha by year 2020. It pointed out that the majority of the land is Native Customary Rights (NCR) land.
On the other hand, the research firm gathered that SOP was the largest listed joint venture (JV) entity, in terms of landbank, with the state government via Pelita. Besides Pelita’s 29 per cent direct interest in the company, it also had one direct joint venture with SOP on NCR scheme.
Given rising greenfield land prices in Sarawak, SOP embarked on a JV strategy with landowners to avoid huge upfront cash for land acquisition. As with any JVs, SOP came up with cash for the development expenditure till maturity whereas the landowner contributed the land. SOP typically ends up with a 60 per cent to 85 per cent of equity stake.
“We believe such a JV structure will be acceptable by the natives as they get to share future income with the operators as opposed to a one-time pay off for the land. Hence, we see further potential for SOP to increase its landbank with its strong track records, financial capability and the strong corporate standing of its major shareholders in Sarawak,” Ong revealed.
On the financial front, SOP planned to spend a combined RM500 million in capital expenditure for 2011 and 2012 to build two mills, one refinery and plantation development expenditures. “We have further imputed RM200 million allocated for new land acquisitions over the next two years. And these capex should be sufficiently funded by its operating cashflows of RM310 million to RM420 million per years.”
By end-2013, it estimated SOP’s net cash would continue to build up to the tune of RM334 million.
With 42.5 per cent of its estates still immature and an average age profile at 7.5 years old, SOP promises robust 16 per cent three-year CAGR in FFB production, 21 per cent three-year earnings per share (EPS) CAGR and yet trades at 8.3 times 2012 price earnings ratio (PER), Maybank IB stated.
Maybank IB pegged SOP’s target price at RM6.80 per share, based on 13 times 2012 PER. “We peg SOP at a slight discount to industry peers which trades at approximately 15.6 times 2012 for its low trading liquidity. Over time, as trading liquidity improves, this discount should narrow or eliminate,” the research house concluded
