RHB Research has maintained a buy call for Sarawak Oil Palms Bhd (SOP) but with a lower target price (TP) of RM2.35 from RM4.45 previously. This lower TP is still a 13.5% upside from the current share price of RM2.07.
“After imputing our revised crude palm oil (CPO) price assumptions, we cut FY20 earnings by 32%. We believe SOP would be adversely impacted by the current weakness in CPO prices given its upstream segment exposure but the effects can be partly mitigated by the expansion of its downstream margin on the back of lower input costs. We believe the company’s valuation is undemanding as it is trading at a 13x FY20 P/E compared to its peers’ range of 16-24x,” it said.
The research house’s current in-house assumption is for Covid-19 to be under control within 1H20. This assumes a 10% decline in demand from the European Union, the US and China as well as a 2.1 million tonnes decline in biodiesel demand in Indonesia, or a total 3.8 million tonnes decline in CPO demand.
This will result in an estimated increase in CPO stock/usage ratio to 20.1% from 18.6%. Based on historical data, CPO prices ranged between RM2,200 and RM 2,400/tonne, when stock/usage ratios were at these levels in 2011 and 2018.
RHB Research is cutting its CPO price forecasts to RM 2,400/tonne for 2020 from RM2,600, while leaving intact its RM 2,500/tonne forecast for 2021 and 2022.
At 4.30pm today, SOP shares were traded at RM2.09, up 15 sen from yesterday’s close with only 64,800 shares changing hands. – March 24, 2020
