Hap Seng Plantations (HAPL) 1H23 headline PATAMI of RM33mn (- 81% YoY) came in below our and consensus expectations, accounting for only 26% and 30% of full year forecast respectively. Given its pure planter position with a single state exposure in Sabah, we see potential downside risk to our earnings forecast for FY23/24 owing to: 1) low productivity as yield may be dampened by uncertainty in weather conditions and ageing profile of its crops (circa 16.6 years) despite replanting activities, 2) higher operating costs, and 3) lower than-expected palm product prices. Downgrade to a SELL call from a HOLD with a new TP of RM1.70 vs. RM1.79 previously; based on hist. low 3-year avg. P/BV of 0.7x and TSH’s FY23/24F’s BV/share of RM2.43.

• Below expectations. 1H23 headline PATAMI of RM32.8mn came in below our and consensus expectations accounting 26% and 30% of full year estimates, respectively. The difference between reported earnings and core earnings is the fair value changes on biological assets amounting to a loss of RM1.96mn in 1H23 versus RM8.14mn gain in 1H22, and gain on disposal of assets held for sale amounting to RM45.3mn recorded in 1H22.

• Dividend. The Board declared an interim DPS of 1.5sen (1H22: 5sen) for 1H23, equivalent to 0.8% yield at current market price.

• QoQ. HAPL’s 2Q23 core PATAMI declined by 45% QoQ despite higher revenue of RM169mn (+6% QoQ) mainly due to higher operating expenses and a decline in sales volume of PK to 7.6k MT (-10%) and PK realized price of RM2,182/MT (-3%), despite an increase in CPO sales volume and ASP to 37.6k tones (+11%) and RM4,088/MT (+2%) respectively.

• YoY/ YTD. On YoY basis, earnings came in lower following a 32%/33% YoY drop in revenue to RM169mn/RM329mn, no thanks to 1) lower ASP realised of palm products, 2) higher production costs, and 3) higher finance costs.

• Outlook. Downside risk to earnings in the near-term may however come from lower-than-expected ASP of palm products realise and lower-than-projected production – amid management that remains focus on increasing productivity at all levels of operation and to reduce unit cost of production.

• Our call. Amid an expected volatility in CPO price and elevated operational costs, we revised lower our FY23/24 earnings forecast to RM68mn and RM61mn respectively from RM125mn and RM99mn previously; as we revisit our assumptions on productions, ASP of palm products, margins and operational costs to be more reflective of our current and future expectations. Downgrade to a SELL call from a HOLD call on HAPL with a new TP of RM1.70 vs. RM1.79 previously; based on hist. low 3-year avg. P/BV of 0.7x and TSH’s FY23/24F BV/share of RM2.43.

Source: BIMB Securities Research - 24 Aug 2023