Investment Highlights

• Hap Seng Consolidated held an analyst briefing last week.

• Hap Seng Plantations' (HSP) net profit fell by 29% YoY in 3QFY17. Comparing 9MFY17 against 9MFY16, HSP's net profit rose by 12% to RM88.9mil as revenue expanded by 4%.

• HSP's FFB production edged down by 4.2% YoY in 9MFY17. Production costs were RM1,247/tonne in 3QFY17 and RM1,370/tonne in 9MFY17 (9MFY16: RM1,256/tonne).

• Key takeaways from the analyst briefing:

1) HSP's unexciting results in 3QFY17 were mainly due to a delay in the delivery of 5,000 tonnes of CPO to a French customer. The vessel, which took delivery of the CPO products, only came in October instead of September. The 5,000 tonnes of CPO were worth about RM8mil in earnings.

2) HSP hopes to achieve an FFB production growth of 2.5% in FY17F. For FY18F, the group reckons that its FFB output may be marginally higher than FY17F's 660,000 tonnes.

3) We understand that HSP's FFB production in 4QFY17 may be higher than 3QFY17 barring unfavourable weather conditions. HSP thinks that its FFB production would be the highest in November 2017. After an unexciting 3QFY17, HSP's FFB yields have started recovering in October and November. HSP's FFB production edged down by 3.9% YoY in 10MFY17.

4) HSP sold forward some of its CPO in the beginning of the year when CPO prices were more than RM2,900/tonne. Hence, the group's average CPO price realised may be higher than spot prices. Year to date, average spot CPO price based on MDEX futures is roughly RM2,800/tonne.

5) HSP's fertiliser costs are expected to increase by 11% to 12% in FY18F. As for minimum wage, we gather that there is a government proposal for a hike in 2018F. During the last increase in July 2016, HSP's cost of wages rose by RM8mil on a full-year basis. Wages account for 40% to 50% of production costs.

6) HSP is anticipated to replant about 1,400ha of ageing oil palm trees in FY17F and 980ha in FY18F. The area of 980ha represents about 3% of the group's planted areas in Sabah. Average age of HSP's oil palm trees is 15 years old currently.

Source: AmInvest Research - 27 Nov 2017