Highlights

• Relatively high FFB yield (3 year average of 22.7 tonnes/ha) compared to its peers. Historically superior FFB yield against Sabah state average indicating efficient maximisation of yield.

• Low production cost of RM1,137/tonne of CPO in FY15 and operating profit of RM3,703/ha is one of the lowest and highest in the sector respectively.

• 90% of its total plantation land bank located in a singular contiguous location giving HSP multiple strategic advantages (36,354ha out of a total area of 40,270ha)

• Efficient mill; HSP recorded an OER higher than the Sabah state average in every year since its IPO in 2007. Sensitivity analysis shows a 0.5% OER difference adds up to RM8.5m in PBT at a CPO price of RM2,500/tonne.

• HSP is a fully certified RSPO sustainable palm oil producer in compliance with global sustainability standards for agriculture, which allows the group to sell its CPO for a premium of $USD30-35 to the market rate.

• HSP does not sell its CPO on a forward contract basis. Therefore the group is able to fully take advantage of the current high CPO price (~RM2,800/tonne).

• Completion of a biogas plant in FY17 is expected to reduce energy costs and help the group maintain its RSPO status.

• FFB production is expected to stay flat for the rest of FY16 but rebound in FY17 as plantations recover from dry weather.

• With a DY of 3.3%, HSP is one of the highest dividend yielding Malaysian plantation counters.

• HSP has a net cash per share of 13 sen based of its most recent results (2Q16) balance sheet.

Risks

• Key risks are slower than expected recovery from dry weather, onset of another dry spell and higher than expected fertiliser cost which accounts for about 20% of CPO production costs.

Forecasts

• Forecasted net income is estimated at RM96m (-1% yoy) in FY16 and estimated to grow to RM119m (24% yoy) in FY17 and RM122.5m (3% yoy) in FY18 due to FFB production rebounding in FY17 coupled with a higher estimated CPO selling price, while production costs remain relatively stable.

Rating

BUY, TP: RM2.76

• HSP has strong fundamentals and is an exceptionally managed plantation company, exemplified by its high FFB yield, low CPO production cost and impressive milling OER.

Valuation

• We initiate HSP with a BUY call at a target price of RM2.76 based on its historical average P/E of 18.5x from FY17 EPS of 14.9 sen. A P/E of 18.5 is on the lower end of our target P/E for the plantation sector and hence represents a somewhat conservative estimate.

Source: Hong Leong Investment Bank Research - 16 Nov 2016