• HAPL’s 6M20 core net profit of RM17.5m (>100% yoy) came in within our expectation. Higher earnings attributable to stronger CPO prices were partially offset by lower FFB production
• We make no changes to our 2020-23E core EPS and our CPO ASP stands at RM2,350-2,550/MT
• Maintain BUY With An Unchanged DCF-derived TP of RM2.00 on HAPL

Stronger Qoq Core Net Profit

Sequentially, Hap Seng Plantation’s (HAPL) 2Q20 revenue declined by 18% qoq to RM83.6bn but PBT was stronger at RM31.4m vs. a LBT of RM7m in 1Q20. The earnings turnaround was attributable to higher FFB production, lower unit production cost and gain from disposal of PPE. HAPL’s FFB production increased by 15.7% qoq to 153k MT, but this was partially offset by weaker selling prices of CPO at RM2,321/MT (1Q20 ASP: RM2,814/MT). The lower selling price in 2Q20 was partly attributable to the COVID-19 pandemic and low crude oil prices. After adjusting for one-off items, HAPL’s 2Q20 core net profit jumped by more than 200% qoq to RM13.9m. HAPL declared an interim DPS of 1.5 sen for the quarter (6M19 DPS: 0.5 sen).

6M20 Core Net Profit at RM17.5m – Within Our Expectations

HAPL’s 6M20 revenue was down by 10.1% yoy to RM185.4m, attributable to lower FFB production but partially mitigated by higher CPO average selling prices. FFB production in 6M20 declined by 13.3% to 285k MT (attributable to lagged effect of dry weather back in 2019). HAPL reported a PBT (which includes loss on fair value of biological assets, PPE written off and gain on disposal of PPE) of RM24.4m in 6M20, up more 800% yoy. After adjusting for one-off items, HAPL reported a higher core net profit of RM17.5m vs. a core net profit of RM0.9m in 6M19, which was broadly within our expectations.

Maintain BUY Rating on HAPL and TP Unchanged at RM2.00

We make no changes to our 2020-23E core EPS and our CPO ASP assumptions of RM2,350-2,550/MT. We maintain our BUY rating on HAPL and DCF-derived 12-month target price of RM2.00. Key downside risks to our BUY rating include: 1) a weaker economic growth leading to lower consumption of vegetable oils; 2) a drop in CPO prices; 3) lower-than-expected FFB and CPO production; and 4) changes in government policies.

Source: Affin Hwang Research - 27 Aug 2020