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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 24 Jan 2020, 4:01 PM

 

Hap Seng Plantations - All Eyes On 4QFY19

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9MFY19’s CNL* of RM0.9m is deemed within our (RM11.3m), but below consensus (RM20.3m), expectation. We emphasise that while HSPLANT’s 3QFY19 results did not capture the surge in CPO prices, the results have already shown encouraging signs of improvement (+99.4% QoQ), pointing to a potential blockbuster quarter in 4QFY19. No changes to earnings estimate. Reiterate OUTPERFORM with a higher TP of RM1.90.

9MFY19 deemed within. 3QFY19 posted a negligible core net loss (CNL*) of RM0.03m, bringing 9MFY19 CNL to RM0.9m, which we deem in line with our full-year core net profit (CNP) forecast of RM11.3m but below consensus CNP estimate of RM20.3m. 9MFY19 FFB output of 488k MT came within our FY19 estimate at 68% (typically 9MFY FFB output accounts for 67-70% of the total). No dividend was declared, as expected.

Concrete signs of improvement. QoQ, 3QFY19 posted a negligible CNL of RM0.03m (from CNL of RM4.5m in 2QFY19) on the back of: (i) 15% increase in FFB output, and (ii) marginally higher average CPO/PK prices (+1%/2%), respectively. YoY, 9MFY19 registered CNL of RM0.9m (vs. CNP of RM22.6m in 9MFY18) as: (i) average CPO/PK prices dived 15%/37% respectively, masking an 11% growth in FFB output, and on (ii) higher effective tax rate of 94% (+79ppt), which we expect to normalize in 4QFY19.

Signs pointing to blockbuster 4QFY19. We expect 4QFY19 to register significant earnings improvement in subsequent quarter grounded on higher average CPO prices (MPOB QTD-4QFY19 CPO price: +12% QoQ; RM2,253/MT). We emphasize that that while HSPLANT’s 3QFY19 did not capture the surge in CPO prices (MPOB 3QFY19 CPO price: RM2,018/MT; HSPLANT 3QFY19 CPO price: RM2,038/MT), the results have already shown encouraging signs of improvement (+99.4% QoQ), pointing to a potential blockbuster quarter in 4QFY19. Additionally, we believe the group did not locked in the selling prices prior to the sharp spike in CPO prices, allowing them to fully capitalise on the recent price rally, while FFB growth remains intact given its zero estate exposure to Indonesia, where the major decline in CPO production is expected.

No changes in FY19-20E CNP of RM11.3-40.1m as we expect a blockbuster 4QFY19.

Reiterate OUTPERFORM with a higher Target Price of RM1.90 (from RM1.70) based on higher Fwd. PBV of 0.91x (previously 0.81x), implying -0.5SD below mean. At current price, HSPLANT is only trading at Fwd. PBV of 0.75x (vs. smaller cap planters’ average of 0.89x), implying close to -1.5SD from mean, which we think is unwarranted. We think HSPLANT should at least trade at -0.5SD given: (i) more concrete signs of earnings recovery, (ii) above average FFB growth prospect of 4.5%, and (iii) low EV/planted Ha of c.RM36k, implying 18% discount to small cap planters’ average EV/planted Ha of c.RM44k. On top of that, HSPLANT’s net cash position of c.RM60m is also an attractive quality.

Source: Kenanga Research - 21 Nov 2019

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