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) FY23 CPO production to decline on better productivity, and (iii) dividend payout ratio to normalise from FY23. All in, we raise our FY23-24 core earnings forecasts by 8.0% and 3.4%, as we raise our FFB output assumption. Post earnings revision, we upgrade our rating on HSP to BUY (from Hold earlier), with higher TP of RM2.09 (based on 13x revised FY24 core EPS of 16.1 sen), as valuation has turn attractive following recent share price retracement and the upward revision in our earnings forecasts.

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

Anticipate sharp FFB output recovery in FY23. Management expects FFB output to jump by ~19% to 593k tonnes in FY23 (from 583k tonnes in FY22), as it expects (i) yield recovery (from FFB yield of 18.2mt/ha in FY22 to FFB yield of 20-21mt/ha in FY23) on the back of more conducive weather condition and more areas moving into higher yield bracket, and (ii) more areas moving into maturity bracket (~830ha moving into maturity bracket in FY23 vs. 820ha in FY22).

FY23 CPO production cost to decline on higher productivity. Management expects CPO production cost to decline to ~RM2,300/mt in FY23 (from RM2,559/mt in FY22), as it expects higher FFB output to mitigate higher fertiliser costs (arising mainly from higher fertiliser application), full impact from minimum wage hike, and higher diesel costs. While fertiliser prices have eased from its peak, it will likely remain at elevated level in the near term, as supply of fertilisers remains tight on the back of unresolved tension between Russia and Ukraine.

Capex guidance. Management indicated a capex of RM38m in FY23 (lower than RM78m incurred in FY22), and this will be incurred mainly for construction of a biogas plant and infrastructure works.

Dividend policy: to revert back to payout ratio of 60% from FY23. Total DPS of 12 sen for FY22 (of which 5 sen has already been paid in Sep-22, while the remaining 7 sen will be paid in Mar-23) translates to a dividend payout ratio of 43.5%, which came in lower than dividend policy of 60%, given (i) management’s cautious capital management amid challenging operating environment, and (ii) such dividend amount is already offering a decent yield of >5% at current share price level. Management indicated that dividend payout ratio will revert back to its normalised payout ratio of ~60% from FY23.

Forecast. We raise our FY23-24 core earnings forecasts by 8.0% and 3.4%, as we raise our FFB output assumption (closer to management’s guidance).

Upgrade to BUY with higher TP of RM2.09. Post earnings revision, we upgrade our rating on HSP to BUY (from Hold earlier), with higher TP of RM2.09 (based on 13x revised FY24 core EPS of 16.1 sen), as valuation has turn attractive following recent share price retracement and the upward revision in our earnings forecasts. At RM1.9, HSP is trading at FY23-24 P/E of 10.7x and 11.9x, respectively.

Source: Hong Leong Investment Bank Research - 27 Feb 2023