We recently attended Hap Seng Plantation (HSPLANT)?s 1H17 Results Briefing and returned with a slightly better production outlook thanks to yield recovery. We maintain our positive view thanks to above-average productivity, cost improvement measures and strong balance sheet supporting higher dividend yields against the sector. Tweak up FY17-18E CNPs by 2-4%. Reiterate OUTPERFORM with slightly higher TP of RM3.00 (from RM2.90).

1H17 Results Briefing. We recently attended HSPLANT?s 1H17 Results Briefing, which was well attended by c.30 participants. We came away with a better production outlook for the planter thanks to the good pace of yield recovery, while remaining positive for the long run on cost-reduction measures and solid balance sheet position, supporting above-average dividend yields.

Better yield. Management noted that with good weather and stable labour availability, its Sabah estates are seeing a decent yield outlook in spite of some mid-2016 droughts. As such, management expects to see flat FFB growth in 2017, compared to a previously guided YoY decline. Accordingly, we adjust our FY17-18E FFB growth forecasts from -2% and +6% to +2% and +5%, respectively. Note that our FY18E growth is slightly lowered by 1ppt due to a higher base production in FY17. While HSPLANT?s production growth is lower than the sector average of 8%, we believe this is offset by the group?s above-average yield (c.22 metric tons (MT)/ha against the Malaysian average of c.18MT/ha).

Streamlining costs. Recall that HSPLANT has begun generating power via its new bio gas plant project, which will lower diesel costs for power generation, and allows for additional tax credits, which will be fully utlilised in FY17, potentially reducing tax expense by 10-15%. Management also noted that they have switched their trucking services from an internal workshop basis to a leasing basis which will reduce maintenance cost, while improving reliability and reducing downtime.

FY17E price outlook of RM2,845/MT. Management mentioned they expect to see FY17E CPO prices average RM2,845/MT or 8% higher than FY16E average of RM2,643/MT due to the high prices seen in 1H17. This is higher than our own forecasted RM2,550/MT, providing for potential upside should prices be sustained till late 3Q-4Q17. Management noted that August production could be slightly weaker month-on-month (MoM) on pullback from strong July performance, but production could still see a later peak in Oct-Nov which would be negative for prices. We concur that the production peak has yet to be seen for the year and hence maintain our outlook of price volatility as more clarity in production is seen in later parts of the year.

Adjust up FY17-18E CNPs by 2-4% to RM130-132m after accounting for better production yields and improved cost-efficiencies.

Reiterate OUTPERFORM with higher TP of RM3.00 (from RM2.90) based on unchanged Fwd. PER of 18.1x applied to slightly higher EPS of 16.5 sen (from 16.2 sen). Our Fwd. PER of 18.1x is based on mean valuation basis which we think is justified on HSPLANT?s above- average operations quality offsetting below-average FFB growth prospects. With undemanding valuations of 15.9x against the sector average of c.20x, we also like HSPLANT for its strong balance sheet position with zero borrowings and a cash pile of RM147.8m (or 18.5 sen per share) and the highest dividend yield among planters at 4.2%.

Source: Kenanga Research - 28 Aug 2017