• Maintain SELL (TP: RM1.70) Hap Seng Plantations (HAPL) 9M23’s core PATAMI of RM50.6mn (-72% YoY) was within our expectations but fell short of consensus’ estimates, accounting for 75% and 54% of full year forecast respectively. The difference between reported earnings and core earnings is the fair value changes on biological assets amounting to a gain of RM13.1mn in 9M23, compared to RM16.1mn loss in 9M22, and gain on disposal of assets held for sale, amounting to RM45.3mn, recorded in 1H22. Given HAPL’s pure planter position with a single state exposure in Sabah, we anticipate potential downside risk to its earnings forecast for FY23/24, stemming from: 1) lower-than-expected palm product prices, and 2) higher production costs due to increased input material costs, such as fertilizer prices, diesel, as well as labour and compliance costs. Maintain a SELL call with TP of RM1.70; based on hist. low 3-year avg. P/BV of 0.7x and HAPL’s FY23/24F’s BV/share of RM2.43.

• Key highlights. In 3QFY23, HAPL’s revenue dropped by -3% QoQ/-10% YoY to RM165mn, mainly due to a lower average selling price (ASP) of CPO and PK, decreasing by 1%/25% and 1%/16% respectively to RM3,924/MT and RM2,142/MT (Table 2). Nonetheless, the group’s net profit jumped by >100% QoQ/+65% YoY thanks to lower operating expenses and gain from fair value adjustment of biological assets. Current quarter’s CPO production was higher by 8% QoQ/17% YoY, mainly due to higher FFB production, higher volume of FFB purchased and higher OER.

• Earnings Revision. No change at this juncture.

• Outlook. Looking forward, we maintain caution regarding potential cost pressures and the demand outlook, driven by uncertainties in global economies, inflation, heightened USD/MYR currency exchange rates, and escalating input costs, including fertilizers and diesel prices. In the near term, downside risks to earnings may arise from a lower-than-expected ASP of palm products vis-a-vis last year, as well as lower-than-projected production amidst management's emphasis on increasing productivity at all levels of operation and reducing the unit cost of production.

Source: BIMB Securities Research - 21 Nov 2023