Investment Highlights

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

• We have assumed a FFB growth of 15% in FY23E (vs. 13% in 9MFY23 and -1.6% in FY22). The strong increase in FY23E comes after 3 years of decline in FFB production. Also, we believe that there are no major issues with weather conditions in Sabah currently.

• We think that HSP’s FFB output expansion has been stronger than its peers as the group did not face a significant shortage in labour. Therefore, HSP did not have to recruit and train new workers. It takes 3-6 months to train workers to harvest oil palm trees.

• On the back of stronger CPO production and lower fertiliser costs, we reckon that HSP’s net profit would recover in 2HFY23. Global fertiliser prices have fallen by 30%-50% from the peak. Recall that HSP’s net profit plunged by 78.1% YoY to RM32.8mil in 1HFY23.

• We have assumed HSP’s capex at RM65mil in FY23E. The bulk of the capex is expected to be for the replanting of ageing oil palm trees and road maintenance. Although HSP is constructing its 3rd biogas plant, the bulk of the expenditure would only be incurred in FY24F. The biogas plant is estimated to cost RM20mil in total.

• HSP’s realised CPO price is usually higher than MPOB Sabah prices. We attribute this to the RSPO premium, which is US$35/tonne (RM165/tonne) presently. The strong USD is expected to translate into higher RSPO premium in RM terms.

• HSP has already achieved its FY23E replanting target of 829ha, 2% of the group’s planted areas of 35,000ha. We estimate replanting cost until maturity at RM20,000/haRM25,000/ha.

• HSP is currently trading at a FY24F PE of 12.6x, which is higher than its 2-year average of 10x. We believe that the premium is justified due to the group’s strong FFB output growth, which is above its peers.

Source: AmInvest Research - 6 Nov 2023