Investment Highlights

• We initiate coverage on Hap Seng Plantations (HSP) with a HOLD recommendation and fair value of RM2.20/share. Our fair value for HSP is based on FY23F PE of 18.0x. We have also used the PE of 18.0x to derive TSH Resources’ fair value. We ascribe a three-star ESG rating to HSP.

• Based on our earnings forecasts, HSP is currently trading at FYE12/22E PE of 12.6x and FYE12/23F PE of 16.1x. In comparison, TSH’s FYE12/22F PE is 16.0x.

• HSP’s dividend yields are decent. We forecast HSP’s dividend yields to be 7.1% in FY21E and 5.1% in FY22F based on a share price of RM1.98/share. Dividend payouts are estimated to be 64.5% in FY21E and 63.5% in FY22F.

• We expect HSP’s capex to be RM50.0mil each in FY21E (FY20: RM54.7mil) and FY22F. HSP’s capex consists mainly of maintenance of infrastructure and replanting of ageing oil palm trees. HSP’s capex is not as heavy as its peers as most of the group’s landbank has already been fully planted.

• HSP has not acquired any landbank in recent years. Instead in November 2021, HSP sold 623.8ha of land in Tawau to Hap Seng Consolidated for RM84.9mil. In June 2020, HSP sold 552ha of land in Tawau, Sabah to Hap Seng Consolidated for RM76.0mil or an estimated RM137,583/ha. We believe that Hap Seng Consolidated plans to launch property projects on both parcels of land in the future.

• HSP is a pure planter. The group does not have palm refining or biodiesel operations. As such, HSP benefits when CPO prices are rising but suffers when CPO prices fall. We estimate that HSP’s net profit would decline by 3% to 5% for every RM100/tonne fall in CPO price.

• Also, HSP sells its CPO mainly at spot prices. Forward sales of CPO are minimal. Hence, HSP’s average CPO price realised is usually close to Sabah spot prices.

• HSP’s FFB production growth is driven mainly by enhancements in yields and not higher mature areas. This is because any increase in mature areas would be offset by HSP’s replanting of ageing oil palm trees every year. At the same time, there are no new plantings as most of HSP’s land are completely planted.

• All of HSP’s oil palm estates are located in Sabah. The group does not have operations in Indonesia. Hence, HSP does not suffer from the Indonesia CPO price discount. In Sabah, HSP’s planted areas of oil palm are in Lahad Datu, Tawau and Kudat.

Source: AmInvest Research - 29 Dec 2021