HSP’s 1H18 net profit of RM19.4m (-69.2%) came in below expectations, accounting for only 18.3-19.1% of our and consensus full-year forecasts, mainly due to lower-than-expected FFB production. We cut FY18-20 net profit forecasts by 21.6-31%, largely to account for lower FFB production assumption. Correspondingly, we downgrade our rating on the stock to HOLD (from Buy previously) with lower TP of RM2.03 (based on 18.5x revised FY19 EPS of 11 sen).

Below expectations. 2Q18 core net profit of RM3.9m (QoQ: -74.5%; YoY: -86.3%) took 1H18 sum to RM19.4m (-69.2%). The results came in below expectations, accounting for only 18.3-19.1% of our and consensus full-year forecasts, mainly due to lower-than-expected FFB production.

Dividend. Declared first interim DPS of 1.5 sen (ex-date: 12 Sep 2018).

QoQ. 2Q18 core net profit shrunk by 74.5% to RM3.9m mainly on the back of lower FFB production (-19%, possibly on the back of the lagged impact from wet weather condition in Sabah area during end-2017 and early-2018, which has in turn resulted in a shift in cropping pattern) and palm product prices.

YoY. 2Q18 core net profit plunged by 86.3% to RM3.9m as higher extraction rates were more than negated by lower palm product prices and FFB production (-19.7%, possibly due to shift in cropping pattern), and higher operating expenses arising from the adoption of MFRS 116 and 141.

YTD. 1H18 core net profit shrunk by 69.2% to RM19.4m mainly on the back of lower palm product prices, higher operating expenses arising from the adoption of MFRS 116 and 141, and marginally lower FFB production (arising from the sharp decline in FFB production during 2Q18).

Forecast. We cut FY18-20 net profit forecasts by 21.6-31%, largely to account for lower FFB production assumption.

Downgrade to HOLD with lower TP of RM2.03. Post downward revision in our earnings forecasts, our TP on HSP is lowered by 21.9% to RM2.03 based on 18.5x revised FY19 EPS of 11.0 sen. We downgrade our rating on HSP to HOLD (from Buy previously) as valuations have become pricier following our downward earnings forecast revisions.

Source: Hong Leong Investment Bank Research - 29 Aug 2018