Investment Highlights

• Hap Seng Consolidated held an analyst briefing last Friday.

• Hap Seng Plantations (HSP) is sticking to its FFB production growth forecast of zero for FY18F. This is in spite of a robust 13.2% YoY increase in 4MFY18. We think that the conservative forecast is due to a potential slowdown in FFB yields in 4QFY18. FFB yields recovered strongly in 4QFY17.

• HSP is expected to replant about 1,000ha of ageing oil palm trees in FY18F, which would cost about RM22mil in total. HSP replanted about 1,400ha of old oil palm trees in FY17.

• Average age of HSP’s oil palm trees, which are located in Sabah is 16 years old. The proposed acquisition of Kretam Holdings would reduce the average age of HSP’s oil palm trees to 14 years old.

• HSP is currently carrying out due diligence on Kretam’s operations. The deadline of the due diligence has been extended two times due to the general election in May and extensive nature of the work.

• HSP expects to complete the due diligence of Kretam by the end of June 2018. If HSP decides to proceed with the RM2.14bil acquisition of Kretam, the corporate exercise is targeted for completion by the end of the year. To recap, HSP has proposed to make a mandatory general offer for Kretam’s shares at RM0.92/share. Kretam’s share price is RM0.775 currently.

• HSP expects its production cost to be RM1,400/tonne in FY18F vs. RM1,318/tonne in FY17 and RM1,159/tonne in FY16. HSP achieved a production cost of RM1,489/tonne in 1QFY18 compared with RM1,606/tonne in 1QFY17.

• Although fertiliser costs rose, HSP’s production cost per tonne declined YoY in 1QFY18 due to the 21.8% YoY surge in CPO production. HSP’s fertiliser costs are expected to increase by more than 10% in FY18F.

• Implementation of the MFRS141 accounting standard is anticipated to result in an RM20mil increase in annual depreciation expense. We are unsure if consensus have already accounted for the higher depreciation expense. Consensus is forecasting a net profit of RM103.4mil for FY18F.

Source: AmInvest Research - 4 Jun 2018