Hap Seng Plantations Holdings Berhad (HSPLANT)’s 9M17 Core Net Profit at RM88.2m missed expectations, at 63% of consensus and 64% of our estimate, on slow production recovery, which led to compressed margins. No dividend was announced, as expected. We lower FY17-18E CNP by 10-4% to reflect lower FFB growth and thinner margins. Maintain MARKET PERFORM with lower TP of RM2.70 (from RM2.80) post earnings adjustment.

9M17 below expectations. 9M17 CNP of RM88.2m is below both consensus’ RM139.5m estimate at 63% and our RM137.7m forecast at 64% on weak production during the quarter of 193.2k MT (-15% vs. 3Q16) leading to margin compression. For the year, FFB production at 461.7k MT was slightly below our forecast at 69%. No dividend was announced, as expected.

Slow going. YoY, 9M17 CNP improved 11% largely due to price improvement of +15% to RM2,573 for CPO and +5% to RM2,416/MT for PK. FFB production was set back by -4% due to the slow recovery from 2016 Sabah droughts. QoQ, CNP weakened 11% due to lower top-line (-15%) as FFB production was flat (+1%) against lower CPO prices (-5% to RM2,765/MT), although this was partly offset by better PK prices (+9%).

Supply pressure offset by weather risk? Management noted that the palm oil crop recovery could lead to global production exceeding consumption, which would then pressure palm oil prices in the near term.

However, a possible La Nina event at year-end could lead to lower global vegetable oil yields, including palm oil, due to disruption of harvesting and formation of healthy fruit bunches. While we agree with management’s ample supply outlook, we note that weather forecasters think that a La Nina event, should it occur, could be short-lived, which would limit the production impact and thus have a relatively weak effect on prices.

Nevertheless, we continue to expect stronger 2H17 production for HSPLANT in line with historical trends, as the 5-year average 1H production averaged at 43% of full-year production.

Lower FY17-18E CNP by 10-4% to RM124-118m as we shift our yield expectations for FY17-18E FFB growth prospect to -2% and +7% from 0-5% previously. We also lower our margin expectations to reflect higher fixed cost due to slow FFB production recovery.

Maintain MARKET PERFORM with lower TP of RM2.70 (from RM2.80) post-earnings adjustment. Our TP of RM2.70 is based on lower FY18E EPS of 14.8 sen (from 15.4 sen) while our Fwd. PER is unchanged at 18.1x based on unchanged mean valuation.

We maintain our mean valuation basis as we think HSPLANT’s above- average operations and yields offset a below-average FFB growth prospect (-2% vs sector average +8%).

Despite the slow ongoing recovery from previous years’ droughts, HSPLANT continues to maintain a healthy balance sheet position with net cash of RM124.1m (15.5 sen/share) supporting a solid 4.3% dividend yield, among the highest under our coverage.

Source: Kenanga Research - 21 Nov 2017