9MFY20 CNP of RM38.9m is within our (68%), but above consensus’  (88%), estimate. 9MFY20 FFB output (74%) and absence of DPS are  also within expectations. Expect another strong set of results in 4QFY20 as higher CPO prices offset potential dip in FFB output. Reiterate OUTPERFORM with a higher TP of RM2.15 @ FY21E PBV of 1.0x (+0.5SD). The stock is traded at an attractive FY21E PBV/PER of  0.85x/19.5x (35%/22% discount to closest peer). Net cash/share of c.RM0.211 eliminates liquidity risk, which is another plus point.

Within our, but above consensus’ expectations. 3QFY20 posted a core net profit (CNP) of RM21.5m (+54% QoQ), bringing 9MYF20 CNP to RM38.9m (vs. CNL of RM6.7m in 9MFY19). This is deemed within our expectation at 68% of full-year estimate but above consensus’ estimate at 88%, with us anticipating another strong quarter in 4QFY20. Note that we have excluded: (i) FV gain on biological assets of RM4.2m, (ii) PPE disposal loss of c.RM0.1m, and (iii) PPE write-off of c.RM0.4m to arrive at our adjusted 3QFY20 CNP. Both 9MFY20 FFB output of 459k MT (-6% YoY) at 74% and absence of DPS are within expectations.

Outstanding results, as expected. YoY, despite lower FFB output (-6%), 9MFY20 returned to the black – registering CNP of RM38.9m (vs. CNL of RM6.7m in 9MFY19) on the back of higher average CPO/PK prices (+28%/+24%). This resulted in EBIT margin expansion (+16.8ppt) to 19.1%. QoQ, 3QFY20 CNP rose (+54%) boosted by seasonally higher FFB output (+14%) and higher average CPO/PK prices (+19%/+13%). This impact was not reflected in the group’s 3QFY20 PBT margin due to a gain in disposal of PPE in 2QFY20 amounting to c.RM12.8m. Stripping off the gain, 3QFY20 PBT margin expanded 4.6ppt.

Watch out for earnings upgrade across the street. We highlight here that our FY20-21E CNP is 30-44% higher than consensus and that earnings upgrades are likely to follow. We expect the group to end the year with another strong set of results in 4QFY20 as higher CPO prices (QTD 4QFY20: +16% QoQ) offset an (expected) industry-wide dip in production in Malaysia.

No changes to earnings estimate as results were in line with expectation.

Reiterate OUTPERFORM with a higher TP of RM2.15 (from RM1.95) based on a higher FY21E PBV of 1.0x (from 0.90x), reflecting +0.5SD valuation. We find it hard to understand why HSPLANT is traded at FY21E PBV of 0.85x (c.35% discount to its closest peer), and FY21E PER of 19.5x (22% discount to closest peer). At the very least, we believe HSPLANT should trade at its book value given its merits such as: (i) ability to remain profitable even during depressed CPO price environment during 2018-2019, (ii) strong earnings outlook, and (iii) strong balance sheet with net cash position of RM169.0m (translating into c.RM0.211/share), which eliminates liquidity risk. Our TP implies FY21E PER of 22.9x which is more reasonable.

Risks to our call are sharp decline in CPO prices and significant rise in fertilizer/transportation costs.

Source: Kenanga Research - 27 Nov 2020