We left HSPLANT’s 3QFY20 results briefing POSITIVE on the group’s near-term outlook. Key positives are: (i) potential upside to our FFB estimate, and (ii) high probability of a stronger 4QFY20 – exceeding our earnings estimate, which will be its near-term share price catalyst. The stellar 4QFY20 ahead will be anchored by higher CPO price, FFB output, CPO sales volume, and better production cost. We raise FY20- 21E CNP by 7-4% and reiterate OP with TP of RM2.15 based on FY21E PBV of 1.0x (+0.5SD). HSPLANT is our TOP PICK. The stock is traded at an unjustified FY21E PBV/PER of 0.84x/18.6x (36%/25% discount to closest peer). Net cash/share of c.RM0.211 eliminates liquidity risk – an added advantage.

3QFY20 Results Briefing. We recently attended Hap Seng Plantations Holdings Berhad (HSPLANT)’s 3QFY20 Results Briefing, which was well attended by c.30-40 participants. We were positively reaffirmed of the group’s near-term outlook with key positives being: (i) potential upside to our FFB estimate, and (ii) high probability of a stronger 4QFY20 – exceeding our earnings estimate.

Potentially stronger-than-expected FFB output. Management reaffirmed that FY20 FFB output should come in c.657k MT (-3% YoY), better than our FY20E FFB of 620k MT (-6% YoY). In essence, this implies a sequential production improvement in 4QFY20 to 198k MT (+14% QoQ), compared to our expected 161k MT (-8% QoQ). Management also expects FY21 FFB output to grow by 5% and based on an expected FY20 FFB output of 657k MT, this works out to c.690k MT in FY21 (vs. our FY21E FFB output of 648k MT).

Benefiting on all fronts – production cost and CPO price realized. 4QFY20 CPO production cost is expected to improve mainly due to: (i) expected improvement in FFB output, and (ii) lower manuring cost. From what we understand, 9MFY20 fertilizer application stood at 74%, with bulk application done in 3QFY20 (34%). For the full-year, management is targeting FY20 production cost of c.RM1,600/MT (9MFY20: RM1,713/MT). Meanwhile, the group’s minimal forward selling strategy will allow it to fully capitalize on higher CPO price. This is evident from the realized CPO price in 3QFY20 of RM2,753/MT (very close to spot prices of RM2,736/MT in Sabah). 4QFY20 average CPO price realized is expected at >RM3,000/MT (QTD-4QFY20 Sabah spot price: RM3,080/MT). Furthermore, 4QFY20 CPO sales volume is expected to improve to c.48k MT (+17% QoQ).

All signs point to a stellar 4QFY20. Based on these points: (i) higher CPO price (QTD4QFY20: +17% QoQ), (ii) expected sequential FFB improvement (+14% QoQ), (iii) greater CPO sales volume (+17% QoQ), and (iv) better production cost, we believe 4QFY20 earnings could be better than expected. Recall that in our previous report (dated 27-Nov-2020), we highlighted that our FY20-21E CNP is 30-44% higher than consensus and that earnings upgrades are likely to follow. We now believe that there is further upside to our earnings forecast, especially looking at our implied 4QFY20 earnings (-13% QoQ, pre- adjustment), and consensus’ estimate (-14% QoQ, post 3QFY20 results update).

Raise FY20E/FY21E CNP by 7%/4% on new FY20E/FY21E FFB growth of - 0.4/+2.0% (vs. -5.6/+4.5% previously). We also raise FY20E DPS by 1.0 sen. 

TOP PICK; Reiterate OUTPERFORM with an unchanged TP of RM2.15 based on FY21E PBV of 1.0x, reflecting +0.5SD valuation. We find it hard to understand why HSPLANT is traded at FY21E PBV of 0.84x (c.36% discount to its closest peer), and FY21E PER of 18.6x (25% 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 22.1x (slightly above -1.0SD) which is more reasonable.

Source: Kenanga Research - 30 Nov 2020