We initiate coverage on Hap Seng Plantations Resources Berhad (HSPLANT) with an OUTPERFORM call and Target Price of RM3.00. We like this pure Sabah-based planter for its above-average production metrics and strong balance sheet position with net cash of RM178m. We also expect HSPLANT to reap the benefits of higher CPO prices, as we upgrade our FY16-17E CPO forecast to RM2,600-2,550/MT (previously RM2,500-2,400/MT).

Small-scale, but well-run planter. With its 39.8k ha land bank wholly based in Sabah, HSPLANT had consistently outperformed both Sabah and Malaysia?s averages for production and OER; with yields of 21-24MT/ha coming in 16-25% above the Malaysian average and OER of 21-22%, compared to the Malaysian average (20-21%). Its efficient production processes contributed to an above- average EBIT margin of 28% in FY15A, well above the sector average of 17%. We expect the company?s yearly replanting policy of 4% to improve long-run yields while lowering average tree age from 15.5 years currently to 13.5 years by 2020 (vs. sector average of 10.9 years).

Solid balance sheet. We also like HSPLANT for its strong balance sheet position with net cash of RM178m, against the sector average net gearing of 0.4x. Its above-average EBIT margins at 28% in FY15 ties with UMCCA for the highest under our coverage. Its strong balance sheet supports a 60% minimum payout policy for a solid 4.0- 4.4% dividend yield in FY16-17E, under our assumed 70% pay-out ratio (in line with historical 72%).

Reaping the benefits of high CPO price. We are optimistic on HSPLANT?s earnings growth prospect as we revise up our FY16-17E CPO price forecast to RM2,600-2,550/MT (from RM2,500-2,400/MT). Even with lagging FY16-17E production (-5% and -4%), we expect HSPLANT to see continued earnings growth at 23-6% on higher prices and better cost efficiency.

Attractive valuations. We think valuations are undemanding with HSPLANT recording a lower EV/ha of RM50.8k compared to the sector average of RM77.3k. Fwd. PER of 16.8x is also attractive compared to mid-size planters? average of 22.5x while current PER of 20.8x is at a 3% discount to the KLPLN small- and mid- size planters? (planted area from 20-70k ha) average of 21.4x. We think the discount is unjustified, considering HSPLANT?s operational performance and solid balance sheet position.

Initiating with OUTPERFORM call and TP of RM3.00 based on Fwd. PER of 19.0x applied to FY17E EPS of 15.8 sen. Our Fwd. PER of 19.0x implies mean valuation which we think is fair, as its below-average FY16-17E FFB growth (-5 and -4% vs. sector average +1-7%) is compensated by above-average operation quality and solid yields with price premiums on earnings sustainability. We initiate our coverage with an OUTPERFORM call on HSPLANT as we like the stock for its well-managed operations with a sustainability focus; attractive valuations against the sector; strong balance sheet position; and above-average dividend yields. Our TP of RM3.00 implies a compelling total return of 25.4% (upside: 21.0%; dividend yield: 4.4%).

Source: Kenanga Research - 21 Dec 2016