TA Securities Research has initiated coverage on Sarawak Plantation Bhd with a buy call at RM3.15 and a target price of RM4.40, a 39% upside.

It described Sarawak Plantation as a laggard play, for its high leverage on CPO price, good earnings outlook with fresh fruit bunches (FBB) production resuming its upward trend from FY08, and it s professional management team.

The research house said every RM100 per tonne increase in crude palm oil price would translate into an additional RM5 million in earnings for the company.

It said the company’s strong link with the Sarawak state government would come in handy with the group’s upstream expansion plan.

“Our indicative target price of RM4.40 translates into a 39% upside from the current price. Buy call maintained,” it said.
TA Research said the management of Sarawak Plantation had given a glimpse of its ambitious expansion plan at a recent private briefing.

“While no specific target was given, we understand that the group intends to raise between RM500 million and RM900 million, partly via bonds issue to fund its landbank expansion,” it said.

Assuming a conservative average cost of RM12,000 per ha (including development cost), that amount translates into 42,000ha to 75,000ha to be acquired, some two or three times larger than its current 33,000ha landbank (excluding 18,400ha to be acquired).

“We understand that the next acquisition target would be in Kalimantan where it has been invited to set up a 50,000ha oil palm estate,” it said.

TA Research said if this materialised, it would be the company’s first expansion outside Sarawak, reflecting its rising maturity and confidence in venturing beyond the home turf.

It said the acquisition cost was attractive at US$300 (RM990) per ha.

This would be cheaper than the RM1,250 to RM2,500 per ha cost for the purchase of a 18,400ha landbank in Mukah, Sarawak, announced in November last year.

It added that the company had ample room to gear up. It has a lean balance sheet currently, with net cash position of RM93 million as at the end of September 2007.

Sarawak Plantation’s total borrowings amounted to RM50 million, which translates into a low 0.11 time gross gearing.

Risk on dividend payout is minimal, as the group is likely to continue generating operating cashflow surplus, thanks largely to rising CPO price.

Management indicated that dividend payout would remain unchanged at 30% of net profit.

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