Investment Highlights

• We visited Hap Seng Plantations (HAPL) recently. Based on consensus estimates, HAPL is currently trading at FY18F PE of 17.4x and FY19F PE of 15.9x. HAPL’s net profit tumbled by 36% YoY to RM15.5mil in 1QFY18 as average CPO price shrank by 20.6% to RM2,596/tonne.

• We believe that HAPL would be concentrating on its Malaysia operations for now. Although the group intends to expand its plantation landbank in Sabah, we reckon that it is not easy to find good quality landbank at a fair price currently. We understand that the market price of prime oil palm estates in Sabah is about RM70,000 to RM80,000/ha.

• We gather that HAPL’s FFB production has been weak from May to July 2018 due to tree stress. HAPL’s oil palm estates are located in Lahad Datu, Tawau and Kota Marudu, Sabah.

• We believe that this could be an indication of the current palm production trends in Sabah. Hence, there is a possibility that industry FFB output in Sabah may reach its highest level either in November or December vs. the usual September or October. As a result, there is risk that high palm production and inventory may continue to exert downward pressure on CPO prices until year-end.

• HAPL’s FFB production is expected to be flat in FY18F. The group’s FFB inched down by 1.1% YoY in 1HFY18. HAPL’s FFB output declined by 19.7% YoY in 2QFY18 after surging by 21.8% YoY in 1QFY18.

• HAPL is envisaged to incur replanting cost of RM20mil in FY18F. The group would be replanting about 1,000ha of ageing oil palm trees in Sabah in FY18F (FY17: 1,412ha). As at end-December 2017, about 54.2% of HAPL’s planted areas comprised oil palm trees, which are more than 17 years old.

• Production cost (all-in) is estimated to be RM1,500/tonne in FY18F vs. RM1,315/tonne in FY17 due to higher costs of wages and fertiliser. Fertiliser costs rose by 9% YoY in 1HFY18. As for the impact of a hike in minimum wage, HAPL’s cost of wages increased by RM4mil/year when there was a RM120/month raise in minimum wage in East Malaysia in mid-2016.

Source: AmInvest Research - 27 Jul 2018