Hap Seng Plantations Holdings Berhad (HSPLANT)’s 1Q18 Core Net Profit (CNP*) at RM15.4m missed both consensus and our forecast at 12% and 13%, respectively, on lower CPO prices, higher depreciation and tax rate. No dividend was announced, as expected. We cut FY18-19E CNP by 21- 14% to RM93-103m. Downgrade to UNDERPERFORM with lower TP of RM2.00 (from RM2.30).

1Q18 below expectations. 1Q18 CNP at RM15.4m was lower than both consensus expected RM132.2m and our forecasted RM118.3m, at 12% and 13%, respectively. This was largely due to lower CPO and PK prices (21% and 31% decline, respectively) combined with higher depreciation charge after a change in accounting policy, and higher effective tax rate for the quarter. FFB production at 162.4k metric tons (MT) was in line at 23% of our forecast. No dividend was announced, as expected.

Price decline hits earnings. YoY, CNP declined 35% on the back of a sharp drop in CPO (-21%) and PK (-31%) prices, despite better FFB production (+22%). Effective tax at 31% was also higher against 26% previously, though we expect this to normalize in later quarters. QoQ, CNP declined 31% on seasonally lower FFB production (-16%), compounded by lower CPO (-3% and PK (-13%) prices. Tax rates were much higher against the previous quarter’s 23% as well.

Mixed outlook. Management noted that Indian demand is expected to decline in the near term despite Chinese demand potentially picking up should soybean tariffs go into effect. We believe that with production expected to improve towards 2H18, CPO prices are expected to continue declining. Operationally, we expect HSPLANT’s unit costs to ease with rising production in 2H. However, recall that we expected its plan to acquire a stake in KRETAM to be earnings dilutive, and the deal is expected to be concluded in FY18, pending shareholders’ approval. As such, investors could expect earnings risks going into end-2018 and likely in FY19 as well.

Cut F18-19E CNP by 21-14% to RM93-103m as we update our depreciation expectations to reflect the change in accounting policy, and tweak our cost expectations to incorporate 1Q18 margin compression.

Downgrade to UNDERPERFORM with lower TP of RM2.00 (from RM2.30) based on lower FY18-19E EPS of 12.3 sen (from 14.9 sen) applied to updated Fwd. PER of 16.1x (from 15.5x). Our Fwd. PER of 16.1x is based on an unchanged mean valuation basis, in line with its FFB growth prospect of 6%, close to the sector average of 8%. Given the short-term earnings setback and potential earnings risk upon its acquisition of the KRETAM stake, we downgrade our call to UNDERPERFORM (from MARKET PERFORM).

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 - 30 May 2018