Sarawak Oil Palms Bhd is seeing strong production momentum and attractive valuation prospects, with a target price (TP) set at RM3.60, indicating a potential 15% upside and a projected 3% yield for the financial year 2025 (FY25). RHB Investment Bank Bhd (RHB Research) maintained a BUY rating on the stock, noting that Sarawak Oil Palms' robust fresh fruit bunch (FFB) growth and reduced production costs, despite some challenges in downstream margins, positioning the company well within the sector. Sarawak Oil Palms' valuation is appealing, trading at an 8.3 times FY25 price-to-earnings (P/E) ratio, in the mid-range among peers at six to 10 times.

The cultivation of oil palms company reported an 8% year-on-year increase in FFB growth up to August, aligning with forecasts due to a relatively young plantation profile. Although heavy rains in Miri recently affected production slightly, Sarawak Oil Palms has assured that overall productivity remains intact, with the FY24 FFB growth target set between 5% and 6%. Given slightly lower-than-expected peak production in recent months, Sarawak Oil Palms has revised its FY24 FFB growth forecast to 7% and increased its FY25-FY26 growth projections to 6% annually.

Efficiency in production costs has also contributed to Sarawak Oil Palms' solid financial performance. The cost of crude palm oil (CPO) production in the first half of 2024 (1H24) was approximately RM2,000 per tonne, reflecting a 3% reduction from 1H23's RM2,050 per tonne.

Management expects full-year production costs for FY24 to decline by an additional 3%-6%, supported by reduced fertiliser expenses and improved yields. RHB Research has accordingly lowered FY24 cost expectations by 7%, with FY25-FY26 estimates reduced by 3% in light of strong production growth.

While facing intensified competition, the downstream segment has shown quarterly improvements, driven by a favourable pricing mix and higher trading activity. The company has highlighted potential headwinds due to India's recent import tax increase on refined products, from 12.5% to 32.5%, and Indonesia's tax policy adjustments favouring local players. While Sarawak Oil Palms maintains an optimistic outlook for 2H24, the research house has set the utilisation rates for FY24-FY26 at 75%, with a conservative outlook on margins, now expected at 2.5%, 3% and 3%, respectively, for the next three years.

With adjusted earnings for FY24 trimmed by 6% and FY25-FY26 forecasts raised by 1% and 4%, Sarawak Oil Palms remains a compelling choice within the sector. The TP of RM3.60, calculated at 11 times FY25 P/E, also includes a 14% environmental, security and governance discount, highlighting Sarawak Oil Palms' strategic positioning amid improving market conditions.