HSP reported net loss of -RM6m in 1Q20 (vs. net profits of RM31.2m in 4Q19 and RM4.5m in 1Q19) vs. HLIB and consensus FY20 profit estimates of RM67.1- 61.1m. The results shortfall was due largely to lower-than-expected FFB output. In a separate announcement, HSP proposed to dispose 552.3 ha of plantation land to Hap Seng Consolidated (its parent company) for RM76m (or RM137k/ha). Apart from the estimated disposal gain of RM19.9m, (which we consider non core), the disposal will have minimal impact on HSP’s future earnings (as FFB output of these land only accounted for 1.9% of HSP’s FFB output in 2019). We lower our 2020-21 net profit forecast by 58.5% and 9% to RM15.4m, mainly to account for lower FFB yield assumptions. Post earnings revision, we lower our sum-of-parts TP on HSP by 6.2% to RM1.36 based on (i) 20x FY21 EPS of 5.9 sen, and (ii) net cash balance of 17.7 sen (as at 31 Mar 2020). We downgrade our rating on HSP to SELL (from Buy earlier), as valuation has become stretched following recent share price run-up and earnings revision.

Weaker-than-expected. HSP reported net loss of -RM6m in 1Q20 (vs. net profits of RM31.2m in 4Q19 and RM4.5m in 1Q19) vs. HLIB and consensus full year profit estimates of RM67.1-61.1m. The results shortfall was due largely to lower-than expected FFB output.

QoQ. Despite higher palm product prices, 1Q20 performance reversed to a net loss of -RM6m (from a net profit of RM31.2m in 4Q19), as higher palm product prices were negated by lower sales volumes (for both CPO and PK, which declined by -31.7% and -24.7% respectively) and higher CPO production cost.

YoY. 1Q20 swung to a net loss of -RM6m (from a net profit of RM4.5m in 1Q19), as higher palm product prices were more than negated by by lower sales volumes (for both CPO and PK, which declined by -40.6% and -29.8% respectively, due to favourable inventories movement in previous quarter) and higher CPO production cost.

FFB output. FFB output fell -30.1% YoY to 132k tonnes in 1Q20, dragged mainly by changes in cropping pattern and 1-week impact arising from suspension of operations (resulted from Covid-19 Movement Control Order).

RPT with Hap Seng Consolidated. In a separate announcement, HSP proposed to dispose 552.3 ha of plantation land to Hap Seng Consolidated (its parent company) for RM76m. The proposed transaction translates to a price tag of RM137k/ha, which seems on the higher end compared to the plantation land deals in Sabah in the past. Apart from the estimated disposal gain of RM19.9m, (which we consider non -core), the disposal will have minimal impact on HSP’s future earnings (as FFB output of these land only accounted for 1.9% of HSP’s FFB output in 2019). Upon completion, the disposal will result in HSP’s net cash increasing from RM142m (or 17.7 sen as at 31 Mar 2020) to RM218m (or 27.2 sen).

Forecast. We lower our 2020-21 net profit forecast by 58.5% and 9% to RM15.4m and RM47.3m, mainly to account for lower FFB yield assumptions.

Downgrade to SELL, with lower SOP-derived TP of RM1.36. Post earnings revision, we lower our sum-of-parts TP on HSP by 6.2% to RM1.36 based on (i) 20x 2021 EPS of 5.9 sen, and (ii) net cash balance of 17.7 sen (as at 31 Mar 2020). We downgrade our rating on HSP to SELL (from Buy earlier), as valuation has become stretched following recent share price run-up and earnings revision.

Source: Hong Leong Investment Bank Research - 28 May 2020