We recently attended Hap Seng Plantation (HSPLANT)’s 4Q16 Results Briefing and came away still neutral on its near-term prospects but positive on long-term productivity and continued cost improvement measures. Maintain FY17-18E CNP at RM127.130m. No change to our OUTPERFORM call and TP of RM3.00 based on 19.0x Fwd. PER.

4Q16 Results Briefing. We recently attended Hap Seng Plantation (HSPLANT)’s 4Q16 Results Briefing, which was well attended by c.30 participants. We came away still neutral on near-term prospects but maintain our positive view on HSPLANT due to long-term productivity and continued cost improvement measures.

Production recovery in 2H17. The Plantation sector saw significant production impact due to mid-2015 droughts, with HSPLANT seeing the same as 2016 productions softened by 7%. However, the company outperformed the national average decline of 13%. Looking ahead, management believes that considering some dry period was also seen in early-2016, the sector could see meaningful production recovery only from 2H17 onwards. Management’s view is in line with ours and consensus opinions; though we note that price adjustment is likely to be seen ahead of production recovery, over the coming 2Q17.

Biogas savings in progress. Management updated that Phase 1 of the biogas plant project has begun commissioning and is set to begin power generation once turbines are installed. We expect the cost savings from the project to be felt in 2H17, with potential cost reduction of c.5% annually, while we estimate one-off tax credits from each phase of the project to reduce tax expense by 10-15%. Meanwhile, we gather that Phase 2 is currently in the tendering process and should positively impact earnings in FY19.

However, short-term production affected by drought and replanting. Contrary to the sector wide recovery outlook, management mentioned that FY17E production is likely to see a c.3% decline to 640k metric tons (MT), close to our expected 650k MT estimate. The expected decline is due to lingering drought effect in 1H17 and HSPLANT’s replanting program of 4% of the mature area, started in 2012. We are neutral on the replanting program, which limits near-term yield increase but improves productivity over the longer term.

Maintain FY17-18E CNP at RM127-130m as management updates are within our expectations.

Reiterate OUTPERFORM with unchanged TP of RM3.00 based on unchanged Fwd. PER of 19.0x applied to FY17E EPS of 15.8 sen. Our Fwd. PER is based on mean valuation as below-average FFB growth is offset by above-average operations quality and yields. We think the company remains an attractive buy given undemanding valuations (16.9x against the sector average of 19.4x), strong balance sheet position with net cash of RM162m (20.2 sen net cash/share) and highest dividend yield among its peers at 4.2%.

Source: Kenanga Research - 27 Feb 2017