1QFY20 CNP of RM3.6m came below our/consensus’ estimate at merely 5%/6% of full-year estimate, due to lower FFB output (-30% YoY). Proposed disposal of Tawau land (c.2% of group’s matured area and FFB output) at EV/Ha of RM137.5k (106% premium to KUB’s Kinabatangan acquisition in 2017) is positive as it: (i) unlocks land value with net gain of RM19.9m or 2.49 sen/share, and (ii) trims group’s average tree age to c.15.1 years. Slash FY20-21E CNP by 38- 22% on lower FFB and CPO price but reiterate OUTPERFORM with higher TP of RM1.85 on rolled over FY21E PBV of 0.85x. Any weakness in share price reacting to the 1QFY20 results is a buying opportunity.

Below expectations; dragged by production. 1QFY20 posted a core net profit (CNP) of RM3.6m (-50% YoY; -87% QoQ), after excluding FV losses on biological assets amounting to RM9.5m. This is below our/consensus’ estimate at merely 5%/6% of full-year estimate, mainly due to lower-than expected production (-30%), which accounted for 20% of our estimate. The absence of dividend was as expected.

Plantation disappoints. YoY, despite higher CPO/PK prices (+34%/+24%), 1QFY20 CNP nosedived (-50%) on the back of lower FFB output (-30%). Similarly, QoQ, 1QFY20 CNP cratered (-87%) as lower FFB output (-29%) eclipsed higher CPO/PK prices (+18%/+19%).

Positive on the proposed disposal of eight parcels of agricultural land in Tawau, Sabah to its parent company for RM76m. The total area of 552.3 Ha (c.2% of HSPLANT’s total matured area) has a 3-year average FFB output of 12.9k MT which is c.2% of HSPLANT’s total FFB output. The purchase consideration translates into EV/ha of RM137.5k, which we believe is an extremely favorable price given that it is at a 106% premium compared to a similar scale acquisition by KUB (in 2017) in a neighboring district (Kinabatangan) with EV/Ha of RM66.8k. Even against HSPLANT’s proposed acquisition of KRETAM in 2018 (EV/Ha of RM112.8k), the proposed land disposal price (EV/Ha: RM137.5k) is still favorable, reflecting a premium of 22%. Aside from unlocking the value of the land with a RM19.9m net gain on disposal (translating into an increase in BVPS of 2.49 sen), the divestment is also expected to reduce HSPLANT’s average tree age to c.15.1 years (per our estimate). The proceeds from the disposal would be utilized for working capital which should address any short-term liquidity concerns.

Slash FY20-21E CNP by 38-22% on lower FY20-21 CPO price forecast of RM2,300-2,400/MT (vs. RM2,550/MT), and lower FY20-21E FFB output, implying post revision FFB growth of -5%/+4% after accounting for: (i) Sabah estates suspension, (ii) c.13k MT loss of FFB from the proposed land disposal.

Despite earnings downgrade, it is still an OUTPERFORM with a higher TP of RM1.85 (from RM1.65), based on a higher rolled over FY21E PBV of 0.85x (from 0.78x), reflecting -0.5SD from mean. At current price, HSPLANT is trading way below its book value, at only FY21E PBV of 0.78x, which we think is unwarranted given: (i) improving outlook of the plantation sector (B30 in Indonesia to continue), (ii) FY20E earnings growth of 1.3x (partly due to low base effect), and, (iii) strong balance sheet with net cash position of RM84.5m. Any weakness in share price reacting to the 1QFY20 results should serve as a buying opportunity.

Source: Kenanga Research - 28 May 2020