HSP’s 1Q18 net profit of RM15.5m (qoq: -66.3%; yoy: -54.6%) came in below expectations, accounting for only 11.7-12.4% of consensus and our full-year forecasts. Key deviations against our forecast include (i) higher-than-expected production cost, and (ii) the adoption of new accounting standards (namely MFRS 116 and 141). Maintain BUY with lower TP of RM2.60, to reflect (i) the downward revision in our net profit forecasts, and (ii) the roll forward of our valuation base year to FY19.

Below expectations. 1Q18 net profit of RM15.5m (qoq: -66.3%; yoy: -54.6%) came in below expectations, accounting for only 11.7-12.4% of consensus and our full-year forecasts. Key deviations against our forecast include (i) higher-than-expected production cost, and (ii) the adoption of new accounting standards (namely MFRS 116 and 141), which resulted in higher operating expenses (in particularly, depreciation charges, we believe).

QoQ. 1Q18 net profit shrunk 66.3% to RM15.5m, mainly on the back of seasonally lower sales volume of CPO and PK (arising from seasonally lower yield trend), lower palm product prices, and higher operating expenses arising from the adoption of MFRS 116 and 141.

YoY. 1Q18 net profit declined by 54.6% to RM15.5m as higher CPO and PK sales volume (in tandem with higher FFB production and extraction rates) were more than offset by lower palm product prices, and higher operating expenses arising from the adoption of MFRS 116 and 141.

Forecast. We cut FY18-20 net profit forecasts by about 10.6-14.6%, largely to account for higher depreciation charge and production cost assumptions.

Maintain BUY, with lower TP of RM2.60. We cut our TP on HSP by 10% to RM2.60, to reflect (i) the downward revision in our net profit forecasts, and (ii) the roll forward of our valuation base year to FY19 (from FY18 previously). Our TP of RM2.60 is based on 18.5x revised FY19 EPS of 14 sen. Maintain BUY

Source: Hong Leong Investment Bank Research - 30 May 2018