We upgrade our rating on HSP to HOLD with a higher sum-of-parts TP of RM1.51 (from RM1.35 earlier). Highlights from conference call with HSP’s management include (i) FFB output guidance of circa 680k mt maintained for FY20 and CPO production cost will reduce significantly (from RM2,11 7/mt in 1Q20), as production has resumed since 10 Apr ; (ii) Effective tax rate will remain low in FY20 driven mainly by the recent commencement of its third biogas plant; (iii) Apart from the expected disposal gain of circa RM20m (net of RPGT), the plantation land disposal will result in additional interest income and lower depreciation charge of circa RM2.8m p.a.. We raise our FY20-21 net profit forecast 110% and 6.6% respectively, to account for higher FFB output assumption in FY20, higher interest income and lower depreciation charges (arising from the land disposal).

Key Highlights From Our Conference Call With HSP Management Include:

FFB output maintained despite shortfall in 1Q20. FFB output fell 30.1% YoY to 132k mt 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). Despite the output shortfall in 1Q20, management is keeping its FFB output guidance of circa 680k mt for FY20 unchanged, as production has resumed since 10 Apr (witnessed by a 41% surge in Apr-20 FFB output).

… Hence significantly lower CPO production cost in subsequent quarters. Given the expected sequential improvement in FFB output, management guided that CPO production cost will average at RM1,400-1,500/mt in FY20 (significantly lower than RM2,117/mt recorded in 1Q20).

Effective tax rate to remain low FY20 on third biogas plant commencement.

Effective tax rate will remain low in FY20, driven mainly by the recent commencement of its third biogas plant, which will result in tax benefit of circa RM6m (likely be realised by 2Q/3Q).

More insights to recent RPT. HSP decided to dispose part of its landbank in Ladang Kawa (for RM76m or RM137k/ha) as the landbank is no longer economically viable (given its low yield resulted from high age profile) and deemed more suitable for property development (given its close proximity to town). The land disposal allows HSP to acquire land bank in Sabah (in particularly, Lahad Datu) at a fraction of the price it sold. Apart from the expected disposal gain of circa RM20m (net of RPGT, expected to be completed soon), the disposal will result in (i) additional interest income (based on our estimates, HSP will receive an additional interest income of RM1.5m p.a. assuming sales proceed of RM60m and interest rate of 2.5%); and (ii) lower depreciation charge of circa RM2.8m p.a..

Forecast. We raise our FY20-21 net profit forecast 110% and 6.6% respectively, to account for higher FFB output assumption in FY20, higher interest income and lower depreciation charges (arising from the land disposal).

Upgrade to HOLD with higher TP of RM1.51. Post earnings revision, we upgrade our rating on HSP to HOLD (from Sell previously), with a higher sum-of-parts TP of RM1.51 (from RM1.35 earlier) based on (i) 20x FY21 EPS of 6.3 sen; and (ii) net cash balance of 25.2 sen/share (after accounting for the expected cash inflow of 6.5 sen/share from landbank disposal).

Source: Hong Leong Investment Bank Research - 2 Jun 2020