Key highlights from HSP’s post-results briefing include: (i) FY22 FFB output guided lowered, and this has led to management revising its CPO production cost guidance upwards (to RM2,100-2,200/tonne from RM1,700/tonne earlier); (ii) fertiliser prices to remain elevated, due to protracted supply tightness, (iii) HSP is currently facing labour shortfall of 5-6% and is awaiting approval for its foreign labour application, (iv) replanting target of ~800 ha in FY22, and (v) capex guidance of RM50m in FY22. We lower our FY22 core net profit forecast by 2.9% to RM246.9m, mainly to account for a 2.1% reduction in our FFB output assumption. Forecasts in FY23-24, on the other hand, remain unchanged. We maintain our HOLD rating with an unchanged SOP TP of RM2.40, based on unchanged 15x FY24 core EPS of 12.7 sen and net cash balance of 49.3 sen.

Below Are Key Highlights From HSP’s Post-results Briefing:

FY22 FFB output guided lower. HSP’s FFB output declined by 6.5% to 304k tonnes in 7M22, dragged mainly by less-than-favourable weather condition in Sabah, while impact from labour shortage is minimal (particularly, for harvesting activities). Given the weak FFB output clocked in YTD, management shared that FFB output in FY22 could only match FY21’s output of 593k tonnes (at ~14% lower than its earlier guidance of 691k tonnes).

CPO production cost guided higher on lower FFB output guidance. Management revised its CPO production cost upwards to RM2,100-2,200/tonne in FY22 (from RM1,700/mt guided earlier), following a 14% cut in its FFB output guidance. Management shared that fertiliser cost will increase marginally in 2H22 (vs 1H22) as it plans to catch up on fertiliser application (which was behind schedule in 1H22).

Fertiliser prices to remain elevated. Management shared that the recent correction in fertiliser prices was due mainly to lower sea freight charges. It expects fertiliser prices to stay elevated in the near term, due mainly to protracted supply tightness (especially from Belarus and Russia).

Labour shortage. Management shared that it is currently facing a labour shortfall of 5- 6% (of which the shortage is mainly for field works), and it is still awaiting approval for its foreign labour application.

Replanting. Management is keeping to its replanting target of ~800 ha in FY22 (equivalent to ~4% of its planted area).

Capex guidance. Management indicated a total capex of RM50m in FY22 (which is comparable to FY21’s capex of ~RM55m), and this will be incurred mainly for estate maintenance and replanting.

Forecast. We lower our FY22 core net profit forecast by 2.9% to RM246.9m, mainly to account for a 2.1% reduction in our FFB output assumption (to 597k tonnes from 610k tonnes earlier). Forecasts in FY23-24 on the other hand, remain unchanged. Our FY22- 24 earnings forecasts are based on (i) average CPO price assumption of RM5,500/4,500/3,800 per tonne, and (ii) FFB output growth assumption of 0.6%, 2.2%, and 3.3%, respectively.

Maintain HOLD with unchanged TP of RM2.40. We maintain our HOLD rating with an unchanged sum-of-parts TP of RM2.40, based on unchanged 15x FY24 core EPS of 12.7 sen and net cash balance of 49.3 sen. While we like HSP for its excellent estate practice (100% RSPO certified) and strong balance sheet, further upside is capped by minimal FFB output growth potential (given its average age profile of 16.5 years).

Source: Hong Leong Investment Bank Research - 29 Aug 2022