• Dry spell middle of this year in Sabah has negatively impacted HAPL’s FFB yield and CPO production in 2Q18.

• However, management maintain its FFB output guidance of +1.7% to 667k tonnes for FY18 with rising CPO costs of production, i.e. production costs of CPO at RM1,520/MT in 1H18 vs. RM1,426/MT in 1H17.

• We revised our earnings forecast lower for FY18 and FY19 to RM49m and RM63m respectively from RM109m and RM114m previously with a TP of RM2.25 and HOLD recommendation.

Impacted by lower ASP

HAPL is highly exposed to weakness in palm product prices as it is a pure planter with highly-concentrated area (Sabah) exposure. HAPL’s 1H18 PBT declined 57% yoy as ASP fell by RM550/MT for CPO and RM595/MT for PK or 18% and 22% respectively. Assuming there will be another 15% and 18% drop in ASP of CPO and PK realised, we estimate that revenue for FY18 will decrease by 16% to RM467.8m whilst Pre-tax Profit will decline by 63% to RM65m in FY18 from FY17.

Lower FFB production expected

Management expects FFB production growth to be lower by +1.7% to 667k tonnes in FY18 as a result of changes in crop pattern, replanting activities and more young palms yet to reach maturity. As at YTD June 2018, HAPL’s replanting programme have covered approximately 500 ha (full year target of 1k ha), which is slightly lower than its replanting policy of 4% of its planted area of 35,957 ha. We estimate production will be lower by +1% yoy to 663k tonnes in FY18 vs. 656k tonnes in FY17.

HOLD with TP of RM2.25

We have revised our FY18 and F19 earnings forecast lower to RM49m and RM63m respectively from RM109m and RM114m previously as we adjust our production, costs and ASP of palm products assumptions. In addition, we have taken into consideration the new accounting standard which have inflated the Group expenses substantially (mostly non-cash item, i.e. depreciation and amortisation), we view that a more appropriate valuation will be P/EBITDA multiple. Based on the next 12-months EBITDA/share estimate of 19.6sen and P/EBITDA ratio of 11.5x (historical 2-yrs average), we derived at a target price of RM2.25 with HOLD recommendation.

Source: BIMB Securities Research - 7 Sept 2018