Investment Highlights

• We maintain BUY on Hap Seng Plantations (HSP) with an unchanged fair value of RM2.15/share, based on FY24F PE of 15x, which is the 5-year mean for small planters. We ascribe a 3-star ESG rating to HSP.

• In spite of a weak set of results in 2QFY23, we remain positive for HSP. Being a pure planter, HSP does not suffer from negative refining margins unlike the larger planters. Also, HSP’s FY24F FFB production growth at 15% is stronger than its peers.

• On an annualised basis, HSP’s 1HFY23 net profit was 28% below our forecast and consensus. The group’s results fell short of our estimates due to a lower-than-expected gross profit margin. We attribute this to increased costs of wages and fertiliser. We have reduced HSP’s FY23E net profit by 28% to account for this.

• HSP’s 1HFY23 core net profit plunged by 78.1% to RM32.8mil in 1HFY23 from RM149.8mil in 1HFY22, dragged by weaker CPO prices and higher costs of production. On a positive note, HSP recorded a robust 12.2% YoY increase in FFB production in 1HFY23.

• Average realised CPO price slid to RM4,033/tonne in 1HFY23 from RM6,378/tonne in 1HFY22 while average palm kernel price contracted to RM2,175/tonne from RM4,236/tonne.

• HSP’s average realised CPO price of RM4,033/tonne in 1HFY22 was 2.4% higher than MPOB Sabah’s average price of RM3,940/tonne. We attribute this to the RSPO premium and the low levels of fatty acids in HSP’s CPO products.

• Comparing 2QFY23 against 1QFY23, HSP’s net profit dived to RM9.4mil from RM23.4mil, dragged by lower FFB production and CPO prices.

• HSP’s FFB output fell by 9.2% QoQ to 141,899 tonnes in 2QFY23. Average realised CPO price was RM3,978/tonne in 2QFY23 vs. RM4,088/tonne in 1QFY23. Average palm kernel price was relatively flat at RM2,168/tonne in 2QFY23 vs. RM2,182/tonne in 1QFY23.

• HSP is currently trading at a decent FY24F PE of 14x vs. its 2-year peak of 16x and offers a compelling dividend yield of 5%. We believe that the premium is justified due to the group’s stronger-than-peer FFB production growth.

Source: AmInvest Research - 24 Aug 2023