Highlights

• Biogas plant completion to yield tax savings. Apart from reducing energy cost, the completion of its biogas plant in FY16 will also result in RM5m tax savings in FY17 (arising from tax incentives granted by the government in order to promote the use of renewable green energy). Moving forward, HSP plans to construct another 2 biogas plants (targeted to complete by end-FY18 and end-FY20, which will result in similar tax savings.
• Higher realised PK price. Following natural disaster in Philippines (responsible for 35% of the world?s coconut oil production, according to WorldBank), low supply in coconut oil has resulted in PKO prices rising drastically (as PKO is considered a close substitute for coconut oil). (realised PK price in FY16 realised PK price: RM2,564/tonne vs. FY15: RM1,600/tonne)
• Lower than expected FFB yield. HSP achieved lower FFB yield of 20.5 tonnes/ha (vs. 21.9 tonnes/ha) and OER of 21% in FY16 (vs. 22% in FY15) due to lingering effects of El-Nino. We expect FFB production to stay subdued in 1H17 before rebounding in 2H17 as the effect of El-Nino has tapered off (evidenced by 2 consecutive months of yoy production growth since Dec-16, based on MPOB monthly figures).
• Slightly higher CPO production cost. HSP reported marginally higher CPO production cost in FY16 (RM1,159/tonne vs. RM1,137/tonne recorded in FY15) amid lower FFB yield and higher labour cost (arising from minimum wage hike in July 2016).

Risks

• Weaker-than-expected FFB production.
• A sharp decline in vegetable oil prices.
• Delay of biodiesel programmes in Malaysia and Indonesia.

Forecasts

• We lift our FY17-19 net profit forecasts by 3%, 2%, and 1% respectively, to account for slightly higher PK price assumptions, RM5m tax savings in FY17 (tax incentives arising from completion of biogas plant), and slightly lower FFB yield assumption in FY17

Rating

BUY (↔), TP: RM2.89

• We reiterate our stance that HSP is one of the best managed pure plantation stocks on the market today. 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, a strategic advantage over its competitors.

Valuation

• Maintain BUY, with a higher TP of RM2.89 (from RM2.83) based on 18.5x revised FY18 EPS of 15.6. Our target P/E of 18.5x is at the lower end of our P/E multiple range for the plantation sector and hence represents a somewhat conservative estimate.

Source: Hong Leong Investment Bank Research - 27 Feb 2017