Investment Highlights

• We maintain BUY on Hap Seng Plantations (HSP) with a higher fair value of RM2.30/share vs. RM2.15/share previously. We have raised HSP’s FY24F net profit by 8% to account for a stronger CPO price assumption of RM4,000/tonne compared to RM3,500/tonne originally.

• Our revised fair value is based on a FY24F P/E of 15x, which is the 5-year mean for small planters. We ascribe a 3-star ESG rating to HSP.

• HSP’s 9MFY23 net profit of RM70.7mil was 8% above our forecast but within consensus estimates. HSP exceeded our expectations due to a fair value gain of RM15mil on biological assets. We have raised HSP’s FY23E net earnings by 8% to account for this.

• HSP’s core net profit contracted by 57.1% YoY to RM70.7mil in 9MFY23, dragged by lower palm product prices and higher cost of production. On a brighter note, HSP’s FFB production climbed by 12.6% YoY in 9MFY23.

• Average realised CPO price declined by 33.3% to RM3,997/tonne in 9MFY23 from RM5,992/tonne in 9MFY22. Average palm kernel price plunged by 41.1% to RM2,164/tonne in 9MFY23 from RM3,671/tonne in 9MFY22.

• HSP’s average realised CPO price of RM3,997/tonne in 9MFY23 was 3.7% higher than MPOB Sabah’s average price of RM3,853/tonne. We attribute this to the RSPO premium and low levels of fatty acid in HSP’s CPO products.

• Comparing 3QFY23 against 2QFY23, HSP’s net profit tripled to RM37.8mil on the back of a fair value gain of RM15mil on biological assets, lower cost of production per tonne and higher volume of output. FFB production grew by 11.9% QoQ to 158,853 tonnes in 3QFY23.

• Average realised CPO price was relatively flat at RM3,924/tonne in 3QFY23 vs. RM3,978/tonne in 2QFY23.

• HSP is currently trading at a FY24F P/E of 12x, which is higher than its 2-year average of 10x. We believe that the premium is justified due to the group’s FFB production growth, which is stronger than its peers.

Source: AmInvest Research - 21 Nov 2023