Key highlights from HSP’s post-results briefing include: (i) FY23 FFB output to improve considerably from FY22, supported by more conducive weather condition and more areas moving into maturity bracket, (ii) expects CPO production to peak in FY22 and decline from FY23, and (iii) replanting programme will remain stable (at ~2.5% of planted area) for FY22-23. All in, we raise our FY22-24 core net profit forecasts. Post earnings revision and switching of valuation methodology, we maintain our BUY rating on HSP, with a higher TP of RM2.57 (from RM2.40 earlier) based on 16.5x revised FY24 core EPS of 15.6 sen.

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

Expect sharp FFB output recovery in FY23. Despite minimal labour shortage (particularly for harvesting activities), 10M22 FFB output fell by -4.6% to 462k tonnes, which was dragged mainly by less favourable weather conditions in Sabah. Given less favourable weather condition and weak FFB output clocked in YTD, management has lowered its FY22 FFB output guidance to 580k tonnes (implying FFB output growth of -2.6%) from 593k tonnes earlier. Moving into FY23, management expects FFB output to recover sharply (by ~15%) to 669k tonnes in FY23, as it expects FFB yield recovery arising from more conducive weather condition and more areas moving into maturity bracket.

CPO production cost guidance. FY22 CPO production cost has been revised higher at ~RM2,600/mt (from RM2,100-2,200/mt earlier), following the downward revision in its FFB output growth. Moving into FY23, management expects lower fertiliser prices (which have eased by 10-15% from its peak) and higher FFB output to drive CPO production cost lower by ~12% to RM2,300/mt.

Replanting programme. Management shared that replanting programme has been on track in FY22, with 828ha of the planted areas being replanted YTD. Moving into FY23, management is targeting to replant another 800 ha (equivalent to ~2.5% of its planted area).

Forecast. We raise our FY22-24 core net profit forecasts by 3.4%/22.6%/3.0%, largely to account for (i) higher realised CPO assumption, which more than offset lower FFB yield and higher production cost assumptions for FY22, in line with management’s guidance), (ii) higher FFB yield and lower CPO production cost assumptions for FY23-24).

TP raised to RM2.57; Maintain BUY. We take the opportunity to switch our valuation methodology on HSP to P/E (from sum-of-parts), as we believe P/E valuation better reflects the value of HSP amidst current sentiment. Post earnings revision and switching of valuation methodology, we maintain our BUY rating on HSP, with a higher TP of RM2.57 (from RM2.40 earlier) based on 16.5x revised FY24 core EPS of 15.6 sen. At RM2.01, HSP is trading at undemanding FY22-24 P/E of 7.3x, 12.2x and 12.9x, respectively.

Source: Hong Leong Investment Bank Research - 29 Nov 2022