Investment Highlights

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

• HSP’s 9MFY22 core net profit (excluding disposal gain of RM27mil) was 26% below our forecast and 20% below consensus. HSP was affected by an increase in production costs and a fair value loss of RM24mil on biological assets in 3QFY22.

• As a result, HSP’s net profit plunged by 66% QoQ to RM23mil in 3QFY22. We reduce HSP’s FY22E net profit by 28% to account for a lower operating profit margin resulting from the higher production costs.

• HSP’s core net profit improved by 27% YoY to RM165mil in 9MFY22 on the back of higher palm product prices and lower effective tax rate. HSP’s FFB production fell by 5.2% YoY in 9MFY22.

• Average CPO price realised grew by 43% to RM5,992/tonne in 9MFY22 from RM4,187/tonne in 9MFY21. Average palm kernel price climbed to RM3,671/tonne in 9MFY22 from RM2,636/tonne in 9MFY21.

• HSP’s average CPO price realised of RM5,992/tonne in 9MFY22 was higher than MPOB’s Sabah spot price of RM5,411/tonne. We attribute this to the RSPO premium.

• HSP’s effective tax rate declined to 19% in 9MFY22 from 24.6% in 9MFY21 as capital gains from the disposal of land were taxed at real property gains rate, which is lower than the statutory rate. Also, there were reversals of deferred tax provisions in 9MFY22.

• Comparing 3QFY22 against 2QFY22, average realised CPO price shrank to RM5,219/tonne in 3QFY22 from RM6,737/tonne in 2QFY22. On a positive note, FFB production expanded by 8.5% QoQ in line with seasonal factors.

• HSP is currently trading at a fully valued FY23F PE of 14x, above its 2-year average of 10x.

Source: AmInvest Research - 24 Nov 2022