Investment Highlights

• Hap Seng Consolidated held an analyst briefing yesterday.

• HSP expects its FFB output to be flat in FY18F vs. a decline of 1% in FY17. Production cost per tonne may rise in FY18F due to higher fertiliser costs. Size of replanting is anticipated to be 1,000ha in FY18F. Replanting cost was RM27mil for 1,400ha in FY17.

• Production costs were RM1,318/tonne in FY17 compared with RM1,159/tonne in FY16. Production costs were RM1,202/tonne in 4QFY17 vs. RM1,247/tonne in 3QFY17.

• HSP said it would be able to maintain its dividend payout of 60% of net profit even after the acquisition of Kretam Holdings.

• Key takeaways from the analyst briefing:

1) HSP believes that Kretam would be able to generate sufficient earnings to offset HSP's interest expense for the financing of the RM2.14bil acquisition (assuming a 100% take-up for the MGO). The target is for Kretam to record a net profit of RM110mil, two years after HSP's acquisition. Kretam recorded a net profit of RM17.2mil in FY17.

2) HSP would be paying about RM93,186/ha for all of Kretam's assets (including refinery, biodiesel plant and three palm oil mills). Just based on Kretam's landbank (including unplanted portion) alone, HSP would be paying about RM80,100/ha. We believe that the market price for oil palm estates in Sabah is between RM65,000 and RM70,000/ha.

3) We understand that the premium for Kretam's landbank is justified because of the "uniqueness of the property". About 5,000ha of the oil palm estates located in Sandakan, have land leases of up to 999 years. This is rare as most land leases have tenure of only 99 years. In addition, some of the land in Sandakan has potential for property development. Also, some of the landbank is located next to the Pan Borneo Highway.

4) The acquisition of Kretam would improve the age profile of HSP's planted areas from 15.3 to 14.8 years. HSP is confident that it would be able to increase group FFB yield from 20.5 to 21.0 tonnes/ha.

5) HSP is also confident that it would be able to improve the utilisation rate of Kretam's palm refinery in Sandakan from 17% to 52% as it would sell its own CPO to the refinery.

6) The due diligence of Kretam's assets is expected to take three months. The EGM for the proposed acquisition of Kretam is anticipated to take place on 19 July 2018. Hap Seng Consolidated, which has a 53% stake in HSP, would be able to vote in the EGM.

Source: AmInvest Research - 2 Mar 2018