Hap Seng Plantations Holdings Berhad (HSPLANT)’s 1H18 Core Net Profit (CNP*) at RM19.2m missed both consensus and our forecast at 19% and 21%, respectively, due to weaker-than-expected FFB production. An interim dividend of 1.5 sen was declared, below our expected 8.0 sen for FY18. We cut FY18-19E CNP estimates by 5-2% to RM89- 101m and revise our dividend forecast to 7.0-8.0 sen. Maintain MARKET PERFORM with lower TP of RM2.10.

1H18 sharply below expectations. 1H18 CNP at RM19.2m was sharply below expectations against both consensus’ full-year estimate of RM101.7m and ours of RM93.4m, at 19% and 21%, respectively. This was largely due to weaker-than-expected FFB production (-1% YoY to 294k MT vs. our expectation of 697k MT). An interim dividend of 1.5 sen was declared, below our expectation of 8.0 sen for FY18.

Price decline hits earnings. YoY, CNP tumbled 85% on the back of a 15% drop in both CPO and PK prices to RM2,460 and RM1,822, respectively. This was exacerbated by a 20% drop in FFB production, attributable to the lingering effect of La Nina in Sabah last year and reduced harvesting activities amid an extended Eid-al-Fitr holiday, resulting in higher cost per unit and EBIT margin compressions by 12.1ppt to 12.9%. QoQ, similarly, CNP plummeted 75% on lower FFB output (-19%), compounded by lower CPO (-5%) and PK (-19%) prices.

Mixed outlook. Management noted that Indian demand for palm oil is expected to remain muted due to higher import duty. However, demand from China could potentially pick up ahead of the winter season. On the production front, we believe FFB would pick up in 2H as the effect of La Nina subsides, although we note that our current assumptions still require trimming. Operationally, we expect HSPLANT’s unit costs to ease with rising production in 2H.

Cut F18-19E CNP by 5-2% to RM89-101m as we cut our FFB growth assumption by 4-1%. We now project FFB output of 685k MT (+4%) for FY18 and 714k MT (+4%) for FY19. We have also trimmed our dividend forecasts to 7.0-8.0 sen from 8.0-9.0 sen following the earnings cut.

Maintain MARKET PERFORM with a lower TP of RM2.10 (from RM2.15) based on lower FY18-19E EPS of 11.9 sen applied to Fwd. PER of 17.5x. Our Fwd. PER of 17.5x is based on an unchanged mean valuation basis, in line with its FFB growth prospect of 4%, close to the sector average of 5%. Given the temporary earnings setback followed by an earnings recovery in 2H, we maintain our MARKET PERFORM call on HSPLANT.

Risks to our call are sharp fluctuations in CPO prices and a precipitous rise in minimum wage.

Source: Kenanga Research - 29 Aug 2018