Highlights

• We attended HSP’s 3Q16 briefing, which reinforced our belief that HSP is one of the most well-managed listed plantation counters.

• CPO production cost for 3Q16 was lower yoy at RM1,077/mt (3Q15: RM1,123/mt) despite the minimum wage hike in July. 9M16 CPO production costs were RM1,256/mt (slightly higher than 9M15 of RM1,191/mt) but deemed still low compared to its peers. The cost increase for the YTD was mainly due to lower CPO production volume arising from lower FFB yield at 14.88mt/ha (9M15: 15.45mt/ha) and slightly lower OER at 21.47% (9M15: 22.05%)

• Management expected FFB production for FY16 at approximately 675,000mt. As of October, the group has produced a total of 546,668mt.

• The group expected CPO realized price for whole FY16 at ~RM2,620/mt as the group has secured some forward sales, higher than a realized price of RM2,411 had they sold purely on the spot. Average selling price for the group in 9M16 was RM2,565/mt. (CPO spot price has risen by ~13% since end Sep 16). We attribute this to their RSPO certification that allows them to sell CPO at a premium to the market.

• FFB production is expected to rebound in FY17 as plantations regionally recover from dry weather that hampered FFB yields in FY15 & 16.

• Attractive DY of 3.5% is one of the highest in the sector.

Catalysts

• CPO price remaining astronomically high in FY17 at current levels of ~RM3,000/mt against our assumed CPO price assumption of RM2,600/mt for HSP coupled with the expected rebound in FFB production.

Risks

• Weaker-than-expected FFB production

• A sharp decline in vegetable oil prices.

• Inability to retain foreign labour would incur foreign worker levy, which would boost overall costs

Forecasts

• Unchanged

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 - 28 Nov 2016