Investment Highlights

• We upgrade Hap Seng Plantations (HSP) to BUY from HOLD as its share price has fallen below our fair value of RM2.20/share. Our fair value of RM2.20/share is based on a FY24F PE of 15x, which is the 5-year average for small-cap planters. We attach a 3-star ESG rating to HSP.

• We understand that so far, there are no issues with weather at HSP’s oil palm estates in Sabah. Rainfall is sufficient. Also, although there were floods early this year, they were not as severe as last year. The areas, which are usually affected by floods comprise less than 5% of HSP’s planted areas of 35,000ha.

• As such, HSP’s FFB production growth is expected to be robust in FY23F (FY22: 1.5%). We have assumed a 15% increase in HSP’s FFB production in FY23F (1QFY23: 14.5% YoY).

• So far, HSP has not faced problems in the recruitment of foreign workers to replace those who are leaving. Due to its small size, HSP has not experienced a significant labour shortage, unlike its larger peers. As at end-FY22, HSP has an estate workforce of 7,700.

• We think that HSP’s FY23F cost of CPO production (all-in) would decline to RM2,400/tonne from RM2,559/tonne in FY22. This is on the back of a higher volume of CPO production and a decline in fertiliser costs.

• HSP’s fertiliser costs are envisaged to ease in 2HFY23 in line with global price trends. Comparing FY23F against FY22, however, HSP’s fertiliser costs are expected to be only marginally lower as costs will still be high in 1HFY23. HSP will be tendering for its 2HFY23 fertiliser requirements soon.

• According to Bloomberg, US Gulf NOLA potash price has fallen by 53.3% from a high of US$802.50/tonne on 1 April 2022 to US$375/tonne on 14 April 2023. Incidentally, due to favourable weather conditions, HSP’s fertiliser application has been on schedule.

• HSP is currently building its 3rd biogas plant, which will cost about RM13mil. Upon the completion of the biogas plant in FY24F, the group would be fully compliant with emissions discharge guidelines stipulated by the authorities. Also, HSP would be able to enjoy investment allowances from the biogas plant.

• HSP is currently trading at an undemanding FY23F PE of 13x, 13% below the 5-year average of 15x for small-cap planters.

Source: AmInvest Research - 27 Apr 2023