• Overview. Hap Seng Plantations Bhd (HAPL) 3Q22 core PBT came  in lower or at 39% YoY and 56% QoQ to RM41.4mn hurt by lower average selling price (ASP) of palm products and sales volumes of  CPO and PK – Table 2. This was also aided by higher operating cost  of RM170.7mn (57% YoY, 9% QoQ) on account of higher manuring  costs due to higher fertiliser prices and programme variance in the  fertiliser’s application, higher diesel costs as well as an increase in  minimum wage during the period.

• Key Highlights. The key variances in 9M22’s core net profit of  RM188.6mn was due to 1) a gain of RM18.8m arising from the  completion of the Hap Seng Plantation (Ladang Kawa) disposal, and  (2) RM16.1mn loss from fair value of biological assets.

• Against estimates: Inline. 9M22 results were within our estimates.

• Outlook. We deem the results for this financial year as satisfactory  though we may see a potential downside risk to our earnings  forecast owing to 1) low productivity due to lower yield and  prolonged labour shortage issue especially for harvester, 2) higher  operating costs, and 3) lower than-expected CPO prices which  could drag HAPL’s earnings – given pure planter’s earnings that are  highly correlated to ASP of palm products and production.

• Our call. In view of lower FFB and CPO/PK production and sales  volumes, and higher operating costs, we revised our FY22 earnings  forecast lower to RM247.7mn from RM274.8mn previously as we  revisit our assumptions on production, ASP of palm products,  margins, costs and expenses to be more reflective of our current  and future expectations. Maintain a HOLD call with a new Target  Price of RM2.17 against RM2.40 previously, based on historical 3- years average P/BV of 0.83x and BV/share of RM2.61.

Source: BIMB Securities Research - 24 Nov 2022