We upgrade Hap Seng (HAPL) to BUY from SELL with a new DCFbased TP of RM1.77, which offers 20% upside. We have changed our valuation method to DCF as we think it better captures expectations of CPO prices and production, and the resulting cash flows. Although HAPL’s 1Q19 core net profit of RM7.1m (-61.3% yoy) came in below our expectations, mainly attributable to lower-than-expected CPO prices and, as such, we cut our 2019-21E core EPS by 9-28% mainly to take into account lower CPO price assumptions, we foresee better quarters ahead.

1Q19 Core Net Profit at RM7m, Below Expectations

Hap Seng Plantation (HAPL) reported a slightly higher 1Q19 revenue of RM126.3m (+4.2% yoy), mainly attributable to higher sales volume of CPO and PK despite lower ASPs. However, its 1Q19 EBITDA margin declined to 23.1%, down 12ppt yoy, due to lower CPO and PK prices as well as the higher operating costs. After excluding one-off items, HAPL’s 1Q19 core net profit dropped by 61.3% yoy to RM7.1m. This was below our expectation and the variance was mainly due to weaker-than-expected CPO and PK prices.

Weaker Core Net Profit Sequentially

HAPL’s 1Q19 revenue increased by 31.4% qoq to RM126.3m but reported a lower PBT of RM7.1m (4Q18 PBT: RM10m). The lower profit was mainly due to the higher operating expenses. CPO sales volume increased by 30% qoq to 52.4k MT, while the CPO ASP for the quarter increased to RM2,099/MT (4Q18: RM1,922/MT). After excluding one-off items, HAPL’s core net profit declined by 55.4% qoq to RM7.1m.

Change to DCF Valuation, Upgrading to BUY With Higher TP of RM1.77

We have cut our 2019-21E core EPS by 9-28%, mainly to take into account lower CPO price assumptions. However, we upgrade HAPL to BUY (from SELL) with a higher DCF-based TP of RM1.77 (previously RM1.60). We have changed our valuation method to DCF as we think it better captures expectations of CPO prices and production, and the resulting cash flows. The share-price correction has turned valuations more attractive, in our view, with the shares trading at 21.6x 2020E PER.

Source: Affin Hwang Research - 30 May 2019