Lower Earnings on Higher Costs of Production

HAPL’s 1Q18 revenue and core net profit were lower yoy to RM121.2m (-15.9%) and RM18.3m (-42.5% yoy), respectively. The decline in revenue was largely due to lower CPO and PK ASPs but partially offset by a higher sales volume. The core net profit came in below our and consensus expectations. The variance to our forecast was mainly due to the higher-than-expected costs of production. As such, we cut our 2018-20 core EPS forecasts by 12-13% to account for the weak results. Our TP is lowered to RM2.38. Maintain HOLD.

1Q18 Core Net Profit at RM18.3m, Below Expectations

Hap Seng Plantation’s (HAPL) reported a lower 1Q18 revenue of RM121.2m (-15.9% yoy to) while PBT plunged by 31% yoy to RM22.4m. The decline in revenue was largely underpinned by lower CPO and PK ASPs that were partially offset by a higher sales volume. The CPO ASP for the quarter declined to RM2,590/MT (1Q17: RM3,268/MT) while the PK ASP declined to RM2,262/MT (1Q17: RM3,282/MT). CPO and PK sales volumes climbed up by 6% and 24% yoy, respectively, to 38,391 MT and 8,874 MT. After excluding one-off items, HAPL’s 1Q18 core net profit fell by 42.5% yoy to RM18.3m, accounting for about 13.3% of our previous 2018 forecast and 13.8% of the street’s forecast. This was below our expectation and the variance to our forecast was partly attributable to the higher-than-expected costs of production.

Maintain HOLD Rating But With a Lower TP of RM2.38

We have cut our 2018-20 core EPS forecasts by 12-13% mainly to account for the weaker-than-expected 1Q18 results. Due to the earnings cuts, our 12-month target price for HAPL is lowered to RM2.38, based on an unchanged 15x PER on 2019E EPS (previously based on 2018E EPS). We maintain a HOLD rating on the stock.

Key Risks

Key upside/downside risks include: 1) a stronger/weaker economic growth leading to a higher/lower consumption of vegetable oils; 2) a sustained rebound/plunge in the CPO price; 3) higher/lower-than-expected FFB and CPO production; and 4) changes in policies.

Source: Affin Hwang Research - 30 May 2018