• Hap Seng Plantations (HAPL) 1Q17 net income of RM34m was in-line with our expectation.

• Revenue grew by 38% yoy (+12% qoq) mainly driven by stronger ASP realized, as well as by a recovery in FFB production.

• HAPL’s PBT in 1Q17 was higher by 98% yoy to RM45.4m, hence raising PBT margin to 31.5% from 22% in 1Q16.

• We maintain our FY17 and FY18 earnings forecast and our TP of RM2.52 on PER of 16x over FY17 EPS.

• Maintain HOLD recommendation.

Earnings within expectation

HAPL’s 1Q17 net profit of RM34.1m came in-line with our expectation, making up 27% of our full year forecast. The improvement in earnings was mainly due to higher average selling price realized during the period which more than off set the increase in operating expenses. EBIT margins improved to 31.5% from 21.7% in 1Q16 as CPO and PK price realized increased 38% and 62% respectively to RM3,268/MT and RM3,282/MT. Operating cost rose by 21% yoy to RM101m mainly due to 1) higher purchase cost of FFB, 2) higher repair and maintenance on roads and bridges caused by flood early this year, and 3) higher wages due to the revision of the minimum wages per month from RM800 to RM920 for Sabah under the Minimum Wages Order 2016 with effect from July 2016.

Lower qoq earnings

Revenue improved by 12% qoq but net earnings fell by 24% mainly due to lower PK sales volume and higher production cost per ton of CPO as a result of higher manuring costs as well as lower FFB production. The lower earnings is also attributed to a reversal of overprovision of labor mobilization costs of RM5m in 4Q16.

Maintaining our numbers

We make no changes to our FY17 and FY18 earnings forecasts at RM125.7m and RM144.6m respectively. Maintain HOLD with unchanged TP of RM2.52 based on PER of 16x (HAPL’s 2- years average) and FY17 EPS.

Source: BIMB Securities Research - 25 May 2017