HSP’s 2Q19 net loss of RM4.3m (vs. core net profits of RM4.5m in 1Q19 and RM3.9m in 2Q18) took 1H19 net profit to RM0.2m (-99.1%). The results came in below expectations, accounting for only 0.5-0.8% of our and consensus full year forecasts, due mainly to higher-than-expected production cost. We lower our FY19-21 net profit forecasts by 19.3%, 6.9% and 5.8%, respectively, mainly to account for higher CPO production cost assumptions. Maintain TP of RM1.48 (based on 0.7x P/B of RM2.12). Despite the less positive result, we upgrade our rating on the stock to HOLD (from Sell previously), given the recent share price underperformance and its strong balance sheet (net cash and net cash per share of RM131.7m and 16.5 sen as at 30 Jun 2019).

Below expectations. 2Q19 net loss of RM4.3m (vs. core net profits of RM4.5m in 1Q19 and RM3.9m in 2Q18) took 1H19 net profit to RM0.2m (-99.1%). The results came in below expectations, accounting for only 0.5-0.8% of our and consensus full year forecasts, due mainly to higher-than-expected production cost.

QoQ. 2Q19 reversed to a net loss of RM4.3m (from a net profit of RM4.5m in 1Q19) due mainly to lower CPO sales volume and lower palm product prices (CPO: -3.9%; PK: -14.0%).

YoY. 2Q19 reversed to a net loss of RM4.3 (from a core net profit of RM3.9m in 2Q18) due mainly to lower CPO sales volume, significantly lower palm product prices (CPO: -18.0%; PK: -35.3%) and higher production cost.

YTD. Net profit plunged 99.1% to RM0.2m in 1H19, as higher CPO sales volume was more than offset by sharply lower palm product prices (CPO: -18.2%; PK: -37.4%) and higher CPO production cost.

Forecasts. We lower our FY19-21 net profit forecasts by 19.3%, 6.9% and 5.8%, respectively, mainly to account for higher CPO production cost assumptions.

Maintain TP of RM1.48; Upgrade to HOLD. Maintain TP of RM1.48 (based on 0.7x P/B of RM2.12, at lower end of end of 10-year historical P/B trend). Despite the results shortfall, we upgrade our rating on the stock to HOLD (from Sell previously), given the recent share price underperformance (share price has fallen by 8.1% since our downgrade in mid-Jun) and its strong balance sheet (net cash and net cash per share of RM131.7m and 16.5 sen as at 30 Jun 2019). Besides, we note that valuation has become more commendable in terms of EV/ha. At current share price of RM1.48, HSP is trading at EV/ha of RM29.3k.

Source: Hong Leong Investment Bank Research - 29 Aug 2019