3Q19 returned to the black, with a net profit of RM0.1m (vs a net loss of RM4.3m in 2Q19 and a net profit of RM3.6m in 3Q18) which took 9M19 core net profit to RM0.3m. We consider the results within our expectation as we anticipate 4Q to come in much stronger, underpinned by higher palm product prices and seasonally higher FFB output. We maintain our earnings forecasts, TP of RM1.68 (based on unchanged 25x FY20 EPS of 6.7 sen), as well as BUY rating on the stock. Despite the limited capital appreciation from our TP of RM1.68 (post share price rally yesterday), we are keeping our BUY rating on the stock, as we believe the sector is still in its early upcycle, and this will continue to boost sentiment on plantation stocks (including HSP).

Within our expectation. 3Q19 returned to the black, with a net profit of RM0.1m (vs a net loss of RM4.3m in 2Q19 and a net profit of RM3.6m in 3Q18), which took the 9M19 sum to RM0.3m. We consider the results within our expectation as we anticipate 4Q to come in much stronger, underpinned by higher palm product prices and seasonally higher FFB output.

QoQ. 2Q19 performance turned around with a profit of RM0.1m (vs. a net loss of RM0.5m in 2Q19) mainly on the back of higher CPO sales volume (which increased by 9.2% QoQ to 37.8k tonnes) and marginally higher realised palm product prices.

YoY. Despite revenue increasing by 33.4% to RM87.5m, 3Q19 net profit declined by 97.2% to RM0.1m (from RM3.6m a year ago), as higher CPO and PK sales volume (which increased by 62.5% and 12.3%, respectively) were more than negated by (i) lower palm product prices (CPO: -8.1%; PK: -34.4%), (ii) the absence of tax benefit arising from investment tax allowance on its new biogas plant, and (iii) finance costs incurred.

YTD. 9M19 core net profit declined by 98.8% to RM0.3m, as higher CPO and PK sales volumes were more than negated by significantly lower palm product prices (CPO: -16.1%; PK: 36.6%), (ii) finance costs incurred, and (iii) higher tax expenses (arising from the absence of tax benefit from investment tax allowance on its new biogas plant).

Forecasts. Maintained, as we believe HSP’s earnings will improve significantly from 4Q19 onwards, underpinned by CPO price upcycle, which has started since early Oct- 19 (CPO spot price has surged by ~20% to circa RM2,450/tonne recently). Based on our estimates, every RM100/tonne change in HSP’s realised CPO selling price will boost its bottomline by circa RM10m per quarter.

Maintain BUY, with unchanged TP of RM1.68. We maintain our BUY rating on HSP with an unchanged TP of RM1.68 based on unchanged 25x FY20 EPS of 6.7 sen. Despite the limited capital appreciation from our TP of RM1.68 (post share price rally yesterday), we are keeping our BUY rating on the stock with a potential upward review bias, as we believe the sector is still in its early upcycle, and this will continue to boost sentiment on plantation stocks (including HSP)

Source: Hong Leong Investment Bank Research - 21 Nov 2019