We came back with an optimistic view on Sarawak Plantation (SWKPLNT)after a meeting with its management. We reckon that the company is now apotential turnaround story that could be worth following. The main catalystwill be the significant jump in the group's FFB yield in the next two years fromits current low base of 13.0mt/ha to 19.8mt/ha in FY13E. The company'svaluation is also extremely attractive as it currently trades at only 9.0xFY12E PER, a PEG of 0.65x, and a EV/planted hectare of c.RM26,000 (all of theseare lower than all planters under our coverage). The additional sweetener will beits superior FY12E-FY13E dividend yield of 5.5%-6.9%. We estimate FY12-13E netprofit to be at RM94m-RM116m, representing a strong 14%-24% YoY growth. Wevalue SWKPLNT at RM3.70, pegging its 3-year average Fwd. PER of 11.0x to ourFY12E EPS of 33.45 sen.
Expects a strongturnaround. SWKPLNT elected a new Managing Director in Mar-2011 and a newChief Operating Officer in Oct-2011. These changes in management saw animpressive earnings growth of 139% YoY to RM82m in FY2011. The good result wasmainly attributed to a successful enhancement of the company's Fresh Fruit Bunch(FFB) yield by 15% to 13.0 mt/ha and the Oil Extraction Rate (OER) by 42pp to21.03%. We believe the company's turnaround is still at its very early stage,judging from the group's low base FFB yield at 13.0 mt/ha. In 2013E, the FFByield should improve to the industry level of c.20.0mt/ha, leading to a 40%surge in the FFB production to 440,488 mt (from 314,758 mt in FY11).
Deeply undervalued.Trading at only 9.0x FY12E PER, a PEG of 0.65x, and a EV/planted hectare ofc.RM26,000, the market has clearly under-appreciated this stock. SWKPLNT'sFY12E PER of 9.0x is at least 32% lower than other mid-cap pure planters whichtrades between 13.3x-15.6x their FY12E PER. Its EV/planted ha. of c.RM26,000 isalso significantly lower than Sarawak Oil Palm's c.RM46,000 and the otherplanters' range of RM70,000-RM73,000.
Aggressive expansionin FY12E. We expect the company to expand its planted area by 9,200 ha(+32% YoY) to 38,504 ha in FY12E. Hence, its immature/planted area ratio willincrease from 12% to 36% by end-FY12E, on par with the bigger-cap planters suchas GENP and IJMP.
Highest dividendyield among planters. We expect generous FY12E-FY13E net dividends of16.7-20.7 sen, representing net dividend yields of 5.5%-6.9%. This is higherthan other planters' net dividend yields, which ranges from 1.3% to 4.4%. Wehave assumed a payout ratio of 50%, slightly lower than the group's 5-yearhistorical payout range of 55%-60% due to its need to conserve some cash to developits land bank.
Good earningsprospect. We expect FY12E-FY13E earnings of RM94m-RM116m, representing astrong growth of 14%-24%. FY12E key earnings driver will be the 23% surge YoYin the FFB roduction to 386,865 mt as the FFB yield improved to 16.8mt/ha (from13.0mt/ha). Note that we have assumedaverage CPO prices of RM3,100 per mt forboth FY12E and FY13E, hence its earnings could surprise on the upside shouldCPO prices turn out to be better than expected.