Investment Highlights

• Hap Seng Consolidated held an analyst briefing a few weeks ago.

• Hap Seng Plantations (HSP) recorded a 67.3% YoY increase in pre-tax profit in 1HFY17 as revenue improved by 29.3%. FFB production was flat YoY in 7MFY17. Production cost per tonne (ex-mill) was RM1,441 in 1HFY17 vs. RM1,376 in 1HFY16.

• Key takeaways from the analyst briefing:
  1. HSP is selling at spot prices currently as there are not many buyers, who are willing to lock in forward prices. We believe that other plantation companies are also doing the same.
  2. HSP is of the view that CPO prices may reach RM2,800/tonne by year-end. However, they are unlikely to exceed RM3,000/tonne.
  3. HSP's FFB production is not expected to rise in FY17F. The group reckons that the amount of FFB processed is envisaged to remain flat at 662,000 tonnes in FY17F. HSP's production patterns are not the same as other plantation companies, which are anticipating double-digit growth in FY17F. This is because HSP did not suffer as much during the El Nino period last year. HSP's internal FFB production only fell by 3.3% in contrast to the 15.3% contraction in CPO output in Sabah in 2016.
  4. HSP's FFB production is anticipated to be marginally lower in August compared with July. The peak of FFB production is expected to take place in October or November 2017. Interestingly, HSP's FFB production may be lower in 2HFY17 compared with 1HFY17.
  5. HSP's production cost (ex-mill) is expected to be higher in FY17F compared with the RM1,159/tonne recorded in FY16. This is due to the increase in the cost of wages resulting partly from the hike in minimum wage last year.
  6. Also, HSP will be incurring leasing charges in FY17F as the group sell its trucks and leased them from another company. In the longer-term, HSP believes that there will be cost savings from the absence of maintenance and spare parts expenses.
• We understand that fertiliser prices are rising as there is not enough supply. Most of the international fertiliser companies have locked in their inventory to sell to China. As such, we reckon that fertiliser prices will increase by low single-digit percentage in FY18F. HSP's parent company, Hap Seng Consolidated is a fertiliser dealer in Malaysia and Indonesia.

Source: AmInvest Research - 13 Sept 2017