• Maintain HOLD (TP: RM1.85). Hap Seng Plantations (HAPL) 1QFY24’s core PATAMI of RM21.4mn (+9% YoY) was in line with our expectations but slightly below consensus full-year forecasts, at 25% and 19%, respectively. The increase in profit YoY was mainly driven by lower production costs, especially reduced in fertilizer cost. This largely offset the revenue drop of -1% YoY due to lower FFB production (-5%) and CPO realised prices (-2%). We expect sustainable earnings in the upcoming quarters, supported by better production and sales volume, although this might be offset by lower palm product prices. We maintain a HOLD call with an unchanged TP of RM1.85, based on the historical low 3-year average P/BV of 0.75x and HAPL’s FY24F BV/share of RM2.46.

• Key highlights. HAPL’s 1QFY24 revenue reduced slightly by -1% YoY to RM159mn, mainly affected by lower CPO realised selling prices (-2% YoY to RM4,023) despite a marginal increase in sales volume (+1% YoY to 34,202 tonnes). FFB production dropped by -5% YoY, mainly due to changes in cropping patterns and lower FFB purchases, although this was partially mitigated by a higher extraction rate. Nevertheless, core PATAMI rose by +9% YoY, thanks to lower production costs, mainly on manuring costs. On a QoQ basis, both revenue and core PATAMI fell by -9% and -45% respectively, due to lower FFB output which also dragged CPO and PK sales volume, increase overall operating costs, and higher effective tax rate (+1 ppts QoQ).

• Earnings Revision. No changes to our forecast.

• Outlook. We are cautiously optimistic on HAPL’s outlook, motivated by positive expectations for FFB output (management guided a 10% YoY increase in harvest) and its strong balance sheet with net cash of 22.9 sen/share. Nonetheless, the potential downside risks to earnings in the near term are higher-than-expected operating costs and lower CPO prices - given that pure planters’ earnings are highly correlated to the ASP of palm products and production. Palm oil prices are expected to come under pressure from an upcycle in global palm oil production and projected strong production of soybean oil in 2024.

Source: BIMB Securities Research - 29 May 2024