Sarawak Oil Palms (SOP MK, NEUTRAL, FV RM7.09, Last Close: RM6.94)

Stock Name: SOP
Company Name: SARAWAK OIL PALMS BHD

Research House: OSK

Price Call: HOLD

Target Price: 7.09

THE BUZZ

Sarawak Oil Palms (SOP) has entered into a JV agreement withShin Yang Shipping (SYS) to purchase two edible oil tankers from Swee Joo at acombined cost of RM45m. SOP will hold a 45% stake in the JV company while SYSwill hold the remaining 55%.

OUR TAKE

Former Swee Jooships. The tankers bought are the two largest tankers Swee Joo has on itsstable at a capacity of 10k and 12k tonnes respectively. SOP will inject cashof RM7.7m for its 45% stake in the JV entity as well as contribute anadditional RM2.3m for working capital purposes, which is insignificant in viewof the company's RM508.4m cash pile. The RM45m price tag on the tankers will befunded through bank borrowings, of which the JV entity will gradually repaythrough funds generated from the ships' operations. We find SOP's participationin the JV not entirely uncommon, as Wilmar also owns its own ships.

First right to use.We understand that SYS, the party with the shipping expertise, will be the onerunning the JV company. What SOP will get from the arrangement is the firstright to use the tankers, with the understanding that the tankers will not befor the sole use of SOP. We also understand that SOP will not be obliged toship their oil exclusively through the JV company and that shipping ratescharged will be based on prevailing market rates. While both SOP and SYS aredirectly related to the Shin Yang Group, the management has repeatedlyemphasized that transactions will be done at arm's length.

Immaterial butoverall positive. The deal appears to be a one-off and not a diversificationattempt to extend itself into the shipping business.  Nonetheless, we think the JV should generallybenefit SOP as its Bintulu refinery comes on stream in 2QFY12. With the firstright to use arrangement, the two oil tankers will provide some guaranteed shippingcapacity for SOP's RBD palm oil to be transported to major edible oil markets likeChina and the Eastern coast of India.

Downgrade to NEUTRAL.We  believe FY13  will be an exciting year on the back of i) higheraverage CPO prices (our price assumptions are RM3,100 per tonne), ii) initial earningscontribution from its refinery, and iii) 13.2% FFB production growth, translating into 19.1% y-o-y earningsgrowth. We will thus raise our FV when we begin looking into FY13. As for nowthough, we are downgrading SOP to NEUTRAL at an unchanged FV of RM7.09, basedon 12.0x FY12 PER. The stock has done extremely well since our initiation inFebruary 2011, providing a return of 87.1% and is the best performing plantationstock within our coverage. While we continue to view the company as one with goodmanagement and strong growth potential, we think the limited upside for now no longerwarrants a BUY call.

Source: OSK188