Hap Seng Plantations Holdings Berhad (HSPLANT) recorded 1H17 Core Net Profit (CNP*) of RM62.4m, within expectations at 46% of consensus and 49% of our forecast. A first interim dividend of 5.5 sen was announced, in line with our 11.0 sen forecast. Reiterate OUTPERFORM with unchanged TP of RM2.90 on updated Fwd. PER of 18.1x (from 18.4x), though valuation basis is maintained at mean levels.

1H17 within expectations. HSPLANT 1H17 CNP came in at RM62.4m, meeting expectations at 46% of consensus RM136.0m and 49% of our RM126.5m forecast. FFB production at 297k metric tons (MT) was also in line at 46% of our estimate. A first interim dividend of 5.5 sen was announced, in line with expectations at half of our 11.0 sen full-year forecast.

Solid improvement. YoY, 1H17 CNP improved 68% to RM62.4m on the back of higher CPO (+21% to RM3,064/MT) and PK (+31% to RM2,654/MT) prices while FFB production staged a recovery to see 3% growth to 297k MT. QoQ, CNP softened 14% to RM28.8m largely on lower prices as CPO declined 11% to RM2,897/MT and PK fell 35% to RM2,142/MT, overriding seasonally stronger FFB production of +23% to 163.8k MT.

Price risks remain. Management observed that abundant global soybean supplies could pressure soybean oil prices and likewise, palm oil prices. We concur that CPO prices have high likelihood of weakening in 2H17, while we continue to expect slightly lower FY17E production at -2% due to replanting measures and lingering Sabah droughts. However, we expect drought recovery and better production from replanted areas to contribute to FY18E FFB growth of 6%, which is closer to the sector average of 8%. Meanwhile, as seasonal production upswing gets underway, we expect cost per ton to decline, which should result in gradual margin improvement towards 3Q17.

Maintain FY17-18E CNP at RM127-130m as results are in line with our expectations.

Reiterate OUTPERFORM with unchanged TP of RM2.90 as we roll forward our valuation base year to FY18E (from average FY17-18E) for slightly higher applied EPS of 16.2 sen (from 16.0 sen) while updating our Fwd. PER to 18.1x (from 18.4x). Our mean valuation basis remains unchanged as we think HSPLANT’s above-average operations quality and yields offset a below-average FFB growth prospect (-2% vs sector average +8%). Valuations remain fairly undemanding, at 16.4x compared to the sector average of 20.5x. We think it is unjustified given HSPLANT’s strong balance sheet position without borrowings and cash pile of RM147.8m (18.5 sen per share), as well as the highest dividend yield among planters under our coverage at 4.2%.

Source: Kenanga Research - 24 Aug 2017