Strong downstream contribution

SOP is off to a strong start in 1Q16 with outperformance from its downstream division which benefited from a stronger MYR (against USD). This more than offset its weak 1Q16 upstream earnings on low FFB output and CPO ASP. Nonetheless, we expect significant upstream earnings catch up in 2H16. BUY with an unchanged RNAV-TP of MYR5.28.

Boosted by fair valuation gains

1Q16 PATMI of MYR25m (+359% YoY, -43% QoQ) met 21% of our full-year earnings estimates - above expectations, as we had expected SOP to start slow given the weak 1Q16 FFB output. The outperformance was largely due to its downstream division with an estimated PBT of MYR25m (1Q15: broke even, +24% QoQ), boosted by fair valuation gains on derivative instruments (MYR17m) and trading gains.

1Q16 output hurt by El Nino impact

SOP’s upstream division had a slow start with an estd. PBT of MYR7m (- 16% YoY, -83% QoQ). 1Q16 FFB output suffered a 5% YoY contraction to 188,590 MT (-30% QoQ) on lagged impact from the relatively dry weather that hit the region in 2015. The low output was in contrast to SOP’s guidance of an 8% YoY FFB growth for 2016 (MKE: +10%). While CPO price has trended sharply higher in recent weeks, the CPO ASP attained in 1Q16 was relatively low at MYR2,251/t (flat YoY, +12% QoQ). We estimate its 1Q16 all-in cost of production at MYR1,977/t (+1% YoY, +68% QoQ).

Expect stronger output in 2H16

In terms of output trend, SOP’s FFB output is highly skewed towards 2H. Over the past 6 years, approximately 57% (on average) of its yearly FFB output was recorded in the 2H of the calendar year. Hence, we expect production to play catch up in the coming quarters. We make no change to our FFB output and earnings forecasts. We continue to like SOP for its growth potential (with a forecast 9% 3-year 2015-18 FFB output CAGR), integrated business model, and strategic landbank in Miri city that is prime for development in the next property upcycle.

Source: Maybank Research - 28 Apr 2016