Investment Highlights

• We maintain HOLD on Hap Seng Plantations (HSP) withan unchanged fair value of RM2.20/share. Our fair value for HSP is based on a FY23F PE of 15x with a neutral 3-star ESG rating.

• Unlike other plantation companies, HSP does not face a significant shortage of labour. Labour shortage was only 6% in 1HFY22. HSP has managed to retain most of its workforce and at the same time, attract new workers from other estates to replace workers who have returned home.

• HSP’s estate workers living in brick houses and infrastructure at most of the oil palm estates are comfortable with the roads being sealed. Also, workers can spend their spare time at the sports complexes and clubhouses that HSP has built.

• Although HSP does not face a shortage of labour, we forecast HSP’s FFB production to be flat in FY22E (FY21: - 8%, 9MFY22: -5% YoY).

• HSP’s FFB yields fell in 2QFY22 after a bumper harvest in 1QFY22. The Hari Raya festivities in early May also affected harvesting in 2QFY22. So far, there are no issues with weather conditions at HSP’s oil palm estates in Sabah.

• We think that HSP’s all-in cost of production would rise to RM2,200/tonne in FY22E from RM1,844/tonne in FY21 as fertiliser costs have doubled. The group is currently concluding fertiliser tenders for 1HFY23.

• RSPO completed its audit of HSP’s palm operations recently with no significant issues. Due to its RSPO certification, HSP enjoys a premium in selling prices. Recall that in 1HFY22, HSP’s average CPO price realised of RM6,378/tonne was 3% higher than MPOB Sabah’s average price of RM6,169/tonne.

• HSP is expected to replant about 830ha of ageing oil palm trees in FY22E with the average age of HSP’s oil palm trees at 16.5 years. We estimate replanting cost to be RM15,000/ha to RM18,000/ha.

• HSP is currently trading at a FY23F PE of 14x, which is higher than its 2-year average of 10x.

Source: AmInvest Research - 8 Nov 2022