Results

• Below expectations. 9M17 core net profit of RM88.9m (+12.3%) came in below expectations, accounting for only 63-64% of our and streets estimates.

Deviations

• Lower-than-expected FFB production, which has in turn resulted in higher-than-expected unit production cost of FFB.

Dividend

• None for the quarter

Highlights

• YoY: 3Q17 net profit declined by 39.3% to RM25.9m due to lower CPO sales volume (which was lower by 32.1%) as FFB production declined by 14.7% as a result of the lingering effect of El-Nino.
• QoQ: 3Q17 net profit fell by 10.2% to RM25.9 (from RM28.9mn 2Q17), mainly due to lower CPO and PK sales volume (which declined by 14.4% and 4.2%, respectively).
• YTD: Although CPO production was lower by 8%, 9M17 net profit rose 12.3% to RM88.9m as a result of higher average CPO and PK selling price (which increased by 16.2% and 5.5% respectively).
• Outlook: Stronger FFB production going forward should result in lower unit production cost for HSP and hence improved margins. We note that FFB production has already shown an uptick in October.

Risks

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

Forecasts

• We lower our FY17 forecasts by 7.5% to account for higher production cost assumption.

Rating

BUY (↔), TP: RM2.89

• HSP has shown the unique aptitude for capturing high CPO selling prices due to its RSPO certification which allows it to sell its CPO for a premium of $USD30-35 (RM100-RM150 on average) to the market rate, a strategic advantage over its competitors. (9M17 CPO average: RM2,721/tonne vs HSP 9M17 CPO ASP: RM2,980/tonne)

Valuation

• Despite lowering our FY17 earnings forecasts, we maintain our BUY call as we expect margins to improve as FFB production rebounds. Our TP of RM2.89 is unchanged based on 18.5x FY18 EPS of 15.6 sen. Our P/E target of 18.5x is at the lower end of our P/E for the plantation sector and hence represents a somewhat conservative estimate.

Source: Hong Leong Investment Bank Research - 21 Nov 2017