Affin Hwang Capital Research Highlights

Author: kltrader   |   Latest post: Mon, 20 Jan 2020, 2:33 PM


Hap Seng Plant - Recovery in CPO Prices to Boost Future Earnings

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Hap Seng Plantation’s (HAPL) 9M19 core net loss of RM6.7m came in below our expectations, mainly attributable to higher-than-expected operating expenses and tax rate. Given the weak 9M19 results, we cut our 2019E core EPS by 78.8%. Meanwhile, we raise our 2020E/2021E core EPS by 37.3%/13.6% to account for a higher CPO ASP assumption (on the back of declining global palm-oil stocks, healthy demand for palm-oil products for the food and energy industries as well as a slower global CPO production growth rate). Given the earnings forecast revisions, we raise our DCF-derived Target Price to RM2.00 (from RM1.70). We maintain our BUY rating on HAPL.

9M19 Core Net Loss at RM6.7m – Below Expectations

Hap Seng Plantation’s (HAPL) 9M19 revenue was flattish yoy at RM293.7m (-0.3% yoy), The CPO and PK average selling prices were lower yoy but were partially mitigated by higher sales volume of both products. However, the 9M19 EBITDA margin declined to 19.6%, down 4.4ppt yoy, due to lower CPO and PK prices as well as higher operating costs. After excluding oneoff items, HAPL reported a core net loss of RM6.7m in 9M19 vs. a core net profit of RM16.3m in 9M18. This was below our expectation and the variance was due to higher-than-expected operating expenses and tax rate.

Another Loss-making Quarter

HAPL’s 3Q19 revenue was up by 9.4% qoq to RM87.5m and reported a PBT (which includes gain on fair value of biological assets of c. RM7.5m) of RM2.5m vs. a LBT of RM4.6m. The increase in revenue was mainly attributable to higher sales volume and ASP of CPO by 9% and 1% qoq respectively to 37.8k MT and RM2,038/MT. However, after deducting tax and excluding one-off items, HAPL posted a core net loss of RM7.6m in 3Q19, widening from a RM6.2m core net loss in 2Q19.

Potentially Better Future Earnings on Higher CPO Prices

After the disappointing 9M19 results, we expect HAPL’s earnings to start to improve in 4Q19 onwards on the back of higher CPO prices, as we anticipate demand for palm-oil products will outpace production. We revise HAPL’s 2019E core EPS lower by 78.8%, after accounting for the higher opex and tax rate, but raise our 2020E/2021E core EPS by 37.3%/13.6% after factoring in a higher CPO ASP assumption of RM2,500-2,600/MT (up from RM2,300-2,500/MT previously).

TP Raised to RM2.00, Maintain BUY Rating

After the revision in our earnings forecasts, we revise upward our DCFderived TP to RM2.00, from RM1.70 previously. We maintain our BUY rating, given a potential 25% upside based on our new TP. We expect HAPL’s earnings to improve with the recovery in CPO prices.

Key Risks

Key downside risks include: 1) a weaker economic growth leading to lower consumption of vegetable oils; 2) a drop in CPO prices; 3) lower-thanexpected FFB and CPO production; and 4) changes in government policies.

Source: Affin Hwang Research - 21 Nov 2019

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