Investment Highlights

• We maintain BUY on Hap Seng Plantations (HSP) with an unchanged fair value of RM2.40/share, based on FY25F PE of 15x, which is the 5-year average for small-cap planters. We ascribe a neutral 3-star ESG rating to HSP.

• Here are the key takeaways from HSP’s analyst briefing: -
  
  ➢ HSP hopes to achieve a FFB production growth of 10% in FY24F. Although the group’s FFB output slid by 4.6% YoY in 1QFY24, production has picked up in April and May. HSP’s FFB production is expected to reach its peak in 3QFY24 or 4QFY24.
  
  ➢ HSP’s FFB output was weak in 1QFY24 as oil palm trees took a breather after a productive 1QFY23. We understand that weather conditions at HSP’s oil palm estates in Sabah were favourable in 1QFY24.
  
  ➢ HSP’s cost of CPO production (ex-amortisation but inclusive of palm kernel credits) declined to RM2,558/tonne in 1QFY24 from RM2,765/tonne in 1QFY23 as fertiliser costs fell by almost 50%. Cost of CPO production is envisaged to be lower at RM2,200/tonne in FY24F vs. RM2,562/tonne in FY23.
  
  ➢ HSP’s 3rd biogas plant will be commissioned in 1QFY25. This is expected to reduce the group’s diesel consumption further. HSP is not anticipated to be affected by the removal of diesel subsidy as it is already paying commercial rates for diesel.
  
  ➢ Apart from diesel savings, electricity generated from biogas plants is used in the palm oil mills, estates and workers’ housing. HSP’s 3rd biogas plant is estimated to cost RM20mil in total.
  
  ➢ HSP plans to replant about 923ha of ageing oil palm trees in FY24F (FY23: 829ha). Cost of replanting until maturity is estimated at RM35,000/ha-RM40,000/ha. The cost of replanting is high as HSP is spending more on infrastructure such as drainage and roads. HSP also plans to implement platform planting of oil palm trees in estates, which are prone to floods.

• HSP is currently trading at a bargain FY25F PE of 11.3x vs. 15x for the 5-year average of large planters. We believe that the stock should be valued at a premium due to HSP’s RSPO certification and pure exposure to CPO prices.

Source: AmInvest Research - 31 May 2024