FY16 CNP at RM124.6m exceeded consensus RM110.9m forecast at 112% thanks to supportive CPO prices, but came in within our RM118.2m forecast at 105%. A second interim dividend of 8.0 sen was announced for full-year 11.0 sen DPS, slightly above our 10.0 sen forecast. Maintain FY17E CNP as we introduce FY18E earnings. Reiterate OUTPERFORM and TP of RM3.00 based on unchanged Fwd. PER of 19.0x.

FY16 beats consensus. Hap Seng Plantations Resources (HSPLANT) FY16 CNP* of RM124.6m came in above consensus RM110.9m forecast at 112%, which we think was due to supportive CPO and PK prices, increasing by 23% and 61%, respectively. However, this was within our RM118.2m forecast at 105%. Production at 662.8m metric tons (MT) was within expectation as well, at 98%. A second interim dividend of 8.0 sen was announced, for full-year DPS of 11.0 sen, slightly exceeding our 10.0 sen forecast.

Price boost. YoY, FY16 CNP improved 28% thanks to solid CPO price appreciation (+23%) and a jump in PK prices (+61%), which well offset softer FFB production (-7%) due to delayed mid-2015 drought impact. QoQ, 4Q16 CNP was slightly better (+6%) against 3Q16, in spite of seasonally softer production (-6%), as margin was boosted by CPO and PK prices which both increased by 11%.

Steady improvement ahead. While the reported production for Jan 2017 at 46.6k MT appears flat against Jan 2016, we note that quarter-to-date average price of RM3,275/MT remains a solid 36% ahead of the 1Q16 average price (RM2,415/MT), which bodes well for 1Q17 top-line and margins. Longer-term, while we conservatively expect FFB growth to soften in FY17 (-4%) due to replanting and lingering drought effect in 1H17; this should be offset by better cost efficiencies and good prices. Meanwhile, FFB production should return to a growth pattern from FY18 on yield recovery.

Maintain FY17E CNP at RM126.5m as we introduce FY18E CNP at RM129.9m. No change to our FY17 estimates as results are in line with our expectations.

Reiterate OUTPERFORM with unchanged TP of RM3.00 based on unchanged Fwd. PER of 19.0x on FY17E EPS of 15.8 sen. Our Fwd. PER of 19.0x is based on mean valuation ? despite possible negative FFB growth in FY17, we think this is compensated by HSPLANT?s above-average operations quality and yields, in addition to its sustainability premium. Valuations remain attractive at 16.8x against the sector average of 21.9x, especially given its strong balance sheet with RM161.6m net cash (20.2 sen net cash/share) and solid dividend yield of 4.2%, currently the highest for planters under our coverage.

Risks to our call include lower-than-expected FFB growth, weaker- than-expected CPO prices and higher-than-expected production costs.

Source: Kenanga Research - 23 Feb 2017