• HAPL’s 9M20 core net profit of RM38.9m, as compared to a core net loss of RM6.7m in 9M19, came in above our expectation mainly due to higher CPO selling prices achieved
• We raise our 2020E/21E core EPS by 44.4%/32.4%, mainly to take into account a higher CPO assumption of RM2,700/MT from RM2,500-2,550/MT previously. Meanwhile, we lower our 2022E core EPS by 6.6% given a lower CPO ASP assumption of RM2,500/MT from RM2,550/MT
• Maintain BUY with a higher DCF-derived TP of RM2.08

Stronger qoq core net profit'

Sequentially, Hap Seng Plantation’s (HAPL) 3Q20 revenue increased by 54.2% qoq to RM128.9m and PBT was stronger at RM33.9m, up 8.1% qoq (2Q20 included a gain arising from disposal of PPE). The increase in PBT was attributable to higher FFB production, lower unit production cost and higher CPO selling prices. HAPL’s FFB production increased by 14.2% qoq to 174k MT and CPO selling prices was higher at RM2,753/MT (2Q20 ASP: RM2,321/MT). The stronger selling prices in 3Q20 were partly attributable to improved demand, tight stock levels, price increases of other edible oils and weather uncertainties. After adjusting for one-off items, HAPL’s 3Q20 core net profit jumped by 54% qoq to RM21.5m.

9M20 core net profit at RM38.9m – above our expectation

HAPL’s 9M20 revenue was higher by 7% yoy to RM314.3m, attributable to higher CPO average selling prices but partially offset by lower FFB production. FFB production in 9M20 declined by 6% to 459k MT (attributable to lagged effect of dry weather back in 2019). HAPL reported a PBT (which includes gain on fair value of biological assets, PPE written off and gain on disposal of PPE) of RM58.3m in 9M20, up more than 100% yoy. After adjusting for one-off items, HAPL reported a core net profit of RM38.9m vs. a core net loss of RM6.7m in 9M19, which was above our expectation.

Maintain BUY rating on HAPL with a higher TP of RM2.08

Given the strong 9M20 results, we raise our 2020E/21E core EPS by 44.4%/32.4%, mainly to take into account higher contribution from the upstream plantation division with a higher CPO assumption of RM2,700/MT from RM2,500-2,550/MT previously. Meanwhile, we lower our 2022E core EPS by 6.6% given the lower CPO assumption of RM2,500/MT from RM2,550/MT. We maintain our BUY rating on HAPL with a higher DCF-derived 12-month target price of RM2.08 (previously RM2.04).

Key risks

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 Nov 2020