HAPL’s 9M18 revenue and core net profit were lower yoy at RM294.7m (-24.7%) and RM16.3m (-76.9%), respectively. The decline in revenue was largely due to lower ASPs, and lower sales volume of CPO and PK. 9M18 core net profit came in below our expectations, mainly due to a weaker-than-expected EBITDA margin. Due to the weakness in CPO prices and our higher production cost assumptions, we cut our 2018-20 core EPS forecasts by 38-63%. Given the earnings forecast revisions and despite a higher target PER of 24x (based on HAPL’s 5-year mean) applied to our 2019E core EPS, we lower our TP to RM1.60 from RM1.90. Reiterate SELL rating on HAPL.

9M18 Core Net Profit at RM16.3m, Below Expectations

Hap Seng Plantation (HAPL) reported a lower 9M18 revenue of RM294.7m (-24.7% yoy), while PBT declined by 76.9% yoy to RM27.2m. The decline in revenue was mainly caused by lower ASPs and sales volumes of CPO and PK. The 9M18 EBITDA margin declined to 25.2%, down 17.2ppt yoy, due to lower CPO and PK prices as well as higher operating costs. After excluding one-off items, HAPL’s 9M18 core net profit dropped by 78.7% yoy to RM16.3m, accounting for 25.4% of our previous 2018 forecast and 27.5% of the street’s forecast. This was below our expectation, attributable to the weaker-than-expected EBITDA margin.

3Q18 Pretax Earnings Swings Into the Red

HAPL’s 3Q18 revenue declined by 39.2% qoq to RM65.6m and reported a LBT of RM2.4m vs. PBT of RM7.2m in 2Q18. The CPO ASP for the quarter declined to RM2,217/MT (2Q18: RM2,460/MT) while the PK ASP increased slightly to RM1,827/MT (2Q18: RM1,822/MT). CPO and PK sales volumes declined by 38.4% and 8.8% qoq, respectively, to 23,279 MT and 6,742 MT. After excluding one-off items, HAPL reported a core net profit of RM1.4m in 3Q18 vs. a core net loss of RM3.3m in 2Q18.

Maintain SELL Rating With a Lower TP of RM1.60

We have cut our 2018-20 core EPS forecasts by 38-63% mainly to account for the weaker-than-expected 9M18 results given the weaker CPO prices and higher production costs. Due to the earnings forecast revisions and despite a higher target PER of 24x (based on HAPL’s 5-year mean; previously 15x based on a 30% discount to the sector’s earlier 2019E average PER of 22x) applied to our 2019E core EPS, we lower our 12- month TP to RM1.60. We maintain our SELL rating.

Key risks4p

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

Source: Affin Hwang Research - 22 Nov 2018