HSPLANT’s 9M18 CNP of RM22.6m missed consensus at 33% and our forecast at 30%, mainly due to weaker-than- expected FFB production and PK prices. No dividend was announced in 3Q18 as usual, but we trim FY18E/FY19E DPS from 7.0/8.0 sen to 3.0/5.0 sen as we cut FY18E/19E CNP by 49%/33% to RM38.9/67.4m. Maintain OUTPERFORM with lower TP of RM1.95 (from RM2.15).

Markedly below expectations. HSPLANT’s 9M18 core net profit (CNP*) of RM22.6m (-70% YoY) was markedly below expectations, accounting for only 33% of consensus estimate (RM68.9m) and 30% of our forecast (RM76.5m). The earnings miss stemmed largely from weaker-than-expected PK prices (RM1,986/MT in 9M18 vs. our FY18E assumption of RM2,300/MT) as well as lower-than-expected FFB output of 440k MT, constituting merely 64% of our full-year expectation of 685k MT (+4%). Low production and PK credit unexpectedly resulted in significant EBIT margin erosion from 26.5% to 9.2%. Nevertheless, CPO price of RM2,435/MT (-18%) remained comfortably above our FY18E assumption of RM2,300/MT. No dividend was announced in 3Q18 as usual, but we trim our FY18E/FY19E dividend per share (DPS) forecasts from 7.0/8.0 sen to 3.0/5.0 sen in tandem with our earnings cut below.

Double whammy of CPO price and FFB declines. YoY, 3Q18 recorded a loss before tax (LBT) of RM2.4m vs. a PBT of RM34.4m in 3Q17 owing to declines in CPO (-20% to RM2,217/MT) and PK (-21% to RM1,827/MT) prices. This was exacerbated by an 11% drop in FFB production to 146k MT, attributable to the lingering effect of La Nina in Sabah last year. However, thanks to an investment tax allowance on the group’s biogas plant, the group booked positive taxation of RM6.0m and consequently, a CNP of RM3.4m (-87%). QoQ, CNP dipped 11% on lower CPO price (-10%), mitigated by FFB growth of 11% to 146k MT and positive taxation as noted.

Recovery seen in 4Q. We gathered from management that there were some timing delays of CPO/PK delivery in 3Q18, which should result in some spillover top-line recognition into 4Q18. Coupled with brighter FFB production outlook (seasonality-driven), we believe sales volume of CPO/PK will be considerably stronger in 4Q18, although it will likely be dampened by the current CPO price weakness. Overall, we still expect better performance sequentially. In spite of this, we cut our FY18E/FY19E FFB forecasts by 4% from 685k/682k MT (+4%/+4%) to 656k/682k MT (flat/+4%), given the production shortfall in 9M18.

Trim F18E/19E CNP by 49%/33% to RM38.9m/67.4m after toning down our FFB forecasts and slashing our PK price assumption by 17% from RM2,300/MT to RM1,900/MT for FY18E and 7% from RM2,300/MT to RM2,150/MT for FY19E.

Maintain OUTPERFORM with a lower TP of RM1.95 (from RM2.15) based on a lower Fwd. PBV of 0.74x (from 0.80x) applied to a reduced FY19E BVPS of RM2.64 (from RM2.68). The Fwd. PBV reflects -2.5 SD below HSPLANT’s mean PBV – a trough valuation – warranted by three consecutive quarters of earnings disappointment. In addition, its CY19E FFB growth prospect of 4% slightly trails the sector average of 5%. Notwithstanding these, we believe HSPLANT’s share price is overly punished as it is currently trading at -3.0 SD below its mean PBV. However, if HSPLANT’s earnings continue to disappoint, we may re-look our valuation with a downside bias.

Risks to our call are a sharp drop in CPO prices and a precipitous rise in labour/fertilizer/transportation cost.

Source: Kenanga Research - 22 Nov 2018