Hap Seng’s (HAPL) 1H18 revenue and core net profit were lower yoy at RM229m (-17.5%) and RM15m (-74%), respectively. The decline in revenue was largely due to lower CPO and PK ASPs. The core net profit came in below our and consensus expectations. The variance to our forecast was mainly due to the weaker-than-expected EBITDA margin and higher-than-expected tax rate. As such, we cut our 2018- 20 core EPS forecasts by 10-30% to account for the weak results and lower our TP to RM1.90 from RM 2.10. Reiterate SELL rating on HAPL.

1H18 Core Net Profit at RM15m, Below Expectations

Hap Seng Plantation (HAPL) reported a lower 1H18 revenue of RM229.1m (-17.5% yoy) while PBT declined by 57.4% yoy to RM29.6m. The decline in revenue was largely underpinned by lower CPO and PK ASPs. The EBITDA margin weakened to 25.9%, down 13.9ppt yoy, due to lower CPO prices and higher operating costs. After excluding one-off items, HAPL’s 1H18 core net profit fell by 74% yoy to RM14.9m, accounting for about 16.2% of our previous 2018 forecast and 14.7% of the street’s forecast. This was below our expectation and the variance to our forecast was partly attributable to the weaker-than-expected EBITDA margin and higher-thanexpected tax rate.

Turning Red in 2Q18

HAPL’s 2Q18 revenue and PBT declined by 11% and 68% qoq, respectively, to RM107.9m and RM7.2m, mainly due to lower CPO and PK ASPs and sales volumes. The CPO ASP for the quarter declined to RM2,460/MT (1Q18: RM2,590/MT) while the PK ASP declined to RM1,822/MT (1Q18: RM2,262/MT). CPO and PK sales volumes declined by 2% and 17% qoq, respectively, to 37,791 MT and 7,391 MT. After excluding one-off items, HAPL reported a core net loss of RM3.3m in 2Q18 vs. a core net profit of RM18.3m in 1Q18. HAPL declared an interim DPS of 1.5 sen (1H17: 5 sen).

Maintain SELL Rating With a Lower TP of RM1.90

We have cut our 2018-20 core EPS forecasts by 10-30% mainly to account for the weaker-than-expected 1H18 results. Due to the earnings cuts, our 12-month target price for HAPL is lowered to RM1.90, based on an unchanged 15x PER on 2019E core EPS. We maintain our SELL rating on the stock.

Key Risks

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

Source: Affin Hwang Research - 29 Aug 2018