Results

• Above Expectations . 9MFY16 core net profit of RM79.1 m (+33.2%) came in above expectations, accounting for 82% and 78% of our and consensus full-year forecasts respectively.

Deviations

• Higher-than-anticipated realized CPO and PK selling price.

Dividend

• None for this quarter, as dividends are usually announced during 2Q and 4Q results.

Highlights

• QoQ. 3Q16 net profit more than doubled to RM42.7m (from RM19.8m in 2Q16), thanks to higher realized average selling price of PK (which rose by 10.7% to RM2,669/mt) and FFB production recovery.

• YoY. 3Q16 net profit jumped 98% to RM42.7m (higher than revenue growth of 55.8% recorded during the quarter) mainly due to higher palm product prices and FFB output recovery.

• YTD: 9M16 net profit rose 33.2% to RM79.1m due mainly to higher CPO and PK realized selling prices (refer to Figure 4), which more than made up for a slightly lower FFB production (as FFB output only started recovering from the lagged impact of dry weather since 3Q16.

• While HSP’s FFB production may have already peaked in 3Q16 (as the latest MPOB statistics indicated that FFB production in Sabah region has started trending down since Oct-16), we believe the strong earnings will be sustained into 4Q, supported by current high palm product prices (CPO spot price has risen by ~13% since end-Sep 16).

Risks

• Weaker-than-expected FFB production; and

• A sharp decline in vegetable oil prices.

Forecasts

• We raised our FY16 net profit forecast by 18% to RM113.4m (largely to reflect higher realized CPO price YTD) and maintained our FY17-18 net profit forecasts as we anticipate CPO prices to normalize from current high CPO spot price of ~RM2,950/mt, as and when more meaningful production recovery takes place (which has already been reflected in our forecast assumptions).

Rating

BUY ( ↔ ), TP: RM2.76

• HSP has shown the unique aptitude for keeping costs down while simultaneously capturing high CPO selling prices due to their RSPO certification which allows them to sell their CPO for a premium of $USD30-35 (RM100-RM150) to the market rate, which gives them strategic advantages over its competitors.

Valuation

• Maintain BUY, with unchanged TP of RM2.76 pegged at unchanged 18.5x PE of FY17 earnings. A P/E of 18.5x is on the lower end of our P/E for the plantation sector and hence represents a somewhat conservative estimate.

Source: Hong Leong Investment Bank Research - 24 Nov 2016