Hap Seng Plantations Holdings Berhad (HSPLANT)’s FY17 Core Net Profit (CNP*) at RM133.5m is slightly above consensus and our forecast at 107% and 108%, respectively. A final dividend of 6.0 sen was announced, for full-year DPS of 11.0 sen, matching our estimate. No change to FY18E earnings as we introduce FY19E CNP of RM120m. Maintain UNDERPERFORM with an unchanged TP of RM2.30.

FY17E slightly above. HSPLANT reported FY17 CNP of RM133.5m, which made up 107% of consensus’ RM125.1m and 108% of our RM123.7m forecasts. For the year, FFB production at 652k metric tons (MT) is in line with our forecast at 101%. A final dividend of 6.0 sen was announced, for full-year DPS of 11.0 sen, exactly in line with our estimate. This implies a pay-out ratio of 65% and dividend yield of 4.4%.

Flat production. YoY, FY17 CNP improved 7% led by higher CPO prices (+7%) as FFB production was marginally lower (-1%) due to slow recovery in their Sabah estates especially in 1H17. QoQ, CNP jumped 76% as FFB production rose 18% to 194k MT, coupled with higher PK prices (+12%), although this was slightly offset by lower CPO prices (-3%). Note that revenue was also boosted by a delayed CPO shipment at the end of the previous quarter, which was instead recognized at the start of 4Q17.

Looking towards expansion. Recall that HSPLANT recently announced its plan to acquire a 55% stake in Kretam Holdings Berhad (KRETAM) for RM0.92/share representing an estimated Fwd. PER of 77x. In our note, we were short-term negative on the deal as the additional cost of financing would override the incremental earnings from the stake. However, we note the potential for long-term synergies given the close proximity of KRETAM’s estates and downstream facilities, which could justify the acquisition in the long term. Nevertheless, we maintain our negative view from a valuation perspective, pending further management’s guidance in its upcoming briefing early next month. As for its own business, management noted the mixed outlook for CPO prices, as high inventories clashed with decent export demand and potential production risk for South American soybean which could raise edible oil prices overall. We continue to expect CPO prices to trade lower than 2017 driven by strong regional production recovery, especially in 2H18.

Maintain FY18E CNP at RM118m as we introduce our FY19E CNP of RM120m. FY18E earnings decline of 12% would largely be driven by softer CPO prices as we expect FFB production to continue recovery at +6%. Meanwhile, FY19E earnings growth of 2% would be driven by estimated FFB production growth of +2%.

Reiterate UNDERPERFORM with unchanged TP of RM2.30 based on unchanged Fwd. PER of 15.5x applied to average FY18-19E EPS of 14.9 sen. Our Fwd. PER of 15.5x implies a -0.5SD valuation basis in view of the negative short-term implications of the KRETAM deal, in addition to the somewhat average FFB production outlook of +6-2% compared to the sector average of 8%. Pending further details on the KRETAM deal from management, we maintain our short-term UNDERPERFORM outlook on HSPLANT.

Risks to our call include: (i) better-than-expected FFB production, (ii) higher-than-expected CPO prices, and (iii) better-than-anticipated outlook on the KRETAM deal.

Source: Kenanga Research - 28 Feb 2018