SOP ... Dec10

S & P Results Review & Earnings Outlook
• SOP posted another quarter of strong earnings. 3Q10 net profit rose 65.6% QoQ to MYR49.4 mln, driven by higher sales volume and palm oil prices. YTD net profit of MYR102.8 mln (up 55.2% YoY) already
accounts for 84.9% of our original full-year forecast.

• Palm oil prices have been stronger than our estimate, with the benchmark MPOB price averaging MYR2,640/ton in 3Q vs. our estimate of MYR2,500/ton. CPO production increased 29.6% QoQ to
72,171 tons due to seasonal factors and more young palms entering into maturity and the prime production period. YTD output grew 7.6% YoY to 172,211 tons, in line with our expectations.

• We lift our net profit forecast by 25.9% for 2010 and 32.4% for 2011. We expect production to ease in 4Q10 due to seasonal factors, but the decline will be made up by higher selling prices. Weather uncertainties
and the weaker USD have contributed to the recent appreciation of CPO price to over MYR3,000/ton. We raise our average CPO price forecast for 2010-2011 to MYR2,700/ton and MYR2,800/ton, respectively (from MYR2,500/ton). We expect the projected recovery in palm oil and soybean oil production in 2011 to put downward  pressure on prices, but the downside should be supported by thecontinued strong demand for edible oils, particularly from China and India.


Recommendation & Investment Risks
• We upgrade our call on SOP to Buy (from Hold) with a higher 12-month target price of MYR3.70 (from MYR2.90).

• We are encouraged by the delivery of another positive earnings surprise. We expect the strong earnings to sustain not only due to the good palm oil prices but also because of our projected 8%-9% growth in production in 2010-2011 due to SOP’s relatively young oil palm plantations. About 75% of SOP’s planted areas of 45,505 ha are young palms of between four years and 10 years old. We also like SOP for its
strong balance sheet, high operating margins and above-average ROE.

• Nonetheless, we expect dividend payout to stay low. SOP intends to substantially reinvest its profits to expand its oil palm-related businesses, and possibly venture into other businesses in Sarawak.

• The target price is based on a PER of 9x on projected earnings for 2010 and includes our projected dividend. The ascribed multiple is the stock’s two-year average rolling PER.

• Risks to our recommendation and target price include palm oil price volatility, which could be caused by a substantial increase in the supply of palm oil and soybean oil, weaker crude oil price and strong USD.