FY18 CNP of RM29.1m missed both our and consensus at 75%, mainly due to lower-than-expected CPO sales volume and PK prices. A 1.0 sen dividend was declared, which brought FY18 dividends to 2.5 sen, slightly below our estimate of 3.0 sen. Cut FY19E CNP by 35% while introducing FY20E CNP of RM49.0m. Downgrade to MARKET PERFORM (from OUTPERFORM) with an unchanged TP of RM1.95.

Markedly below expectations. FY18 core net profit (CNP*) of RM29.1m (-70% YoY) was markedly below both our and consensus estimates, accounting for 75% each. This is the fourth consecutive quarter of disappointment. The earnings miss stemmed largely from: (i) lower-than-expected CPO sales volume (140k MT vs. our 163k MT assumption) and (ii) lower-than-expected PK prices of RM1,821/MT (vs. our RM1,900/MT assumption). However, FFB output of 657k MT (+0.2%) was spot-on with our full-year estimate of 656k MT. A 1.0 sen dividend was declared, which brought FY18 dividends to 2.5 sen, slightly below our estimates of 3.0 sen.

FFB production saved the quarter. YoY, FY18 CNP tumbled 70% largely due to higher unit production cost. We estimate that the unit production cost increased to RM1,550/MT from RM1,315/MT in FY17. As a result, EBIT margin eroded to 9.5% from 24.1% in FY17. In addition, the average CPO price declined 19% to RM2,332/MT while the average PK price plummeted 29% to RM1,821/MT. QoQ, despite lower palm products prices (CPO: -13%, PK: -19%), CNP jumped 88% as FFB output grew 48% to 217k MT.

Recovery in FY19 from a low base. We expect earnings to recover in FY19 from a low base as unit production costs normalizes on a 3% improvement in the CPO price to RM2,400/MT from RM2,332/MT in FY18, while the average PK price to also recover to RM1,900/MT from RM1,821/MT in FY18. In addition, FFB production is projected to grow 4% as Sabah fully recovers from El Nino and La Nina.

Slash FY19E CNP by 35% to RM43.9m while introducing FY20E CNP of RM49.0m. We have reduced CPO sales volume from 169k MT to 149k MT after lowering OER assumption to 20% (from 22.6%), and cut our FY19 PK price assumption by 12% to RM1,900/MT from RM2,150/MT.

Downgrade to MARKET PERFORM (from OUTPERFORM) with an unchanged TP of RM1.95 based on Fwd. PBV of 0.93x applied to FY19E BVPS of RM2.08. The Fwd. PBV reflects -2.0 SD below HSPLANT’s mean PBV, warranted by four consecutive quarters of earnings disappointment. We think that our downgrade is fair given the earnings disappointment and the stock has already trended up 18% YTD, reaching our TP of RM1.95. At the current price level, we believe the negatives are priced in and hence, our MARKET PERFORM call.

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

Source: Kenanga Research - 27 Feb 2019