HSPLANT’s Core Net Profit (CNP) of RM60m (-37% QoQ, +161% YoY) for 1QFY22 surpassed both our as well as consensus estimates by 7%. Stronger CPO prices lifted overall earnings, helping to mitigate flattish (YoY) to weak (QoQ) production. However, we are anticipating easier CPO prices on seasonally higher production come 2H of CY22 but the downside would likely be moderate with prices staying firm on the back of a tight global edible oils market. We are revising up FY22-23 Core EPS by 7-20% on palm prices staying higher for longer. We are maintaining our OP but raising the TP from RM2.65 to RM3.30.

Above expectations: 1QFY22 CNP was lifted by strong CPO price of RM6,019/MT (+18% QoQ, +56% YoY) which more than made up for the lower QoQ FFB output of 0.136m MT (-17% QoQ, +5% YoY). Compared to the sector output for 1QFY22, HSPLANT’s 1Q production did better on QoQ basis but broadly comparable YoY. With no Indonesian estates where palm oil exports attract higher levy and duty including 30% lower CPO prices when the export ban was implemented from 28 April to 23 May 2022, HSPLANT was able to achieve better CPO price than the more regionally diversified peers.

Our stated 1QFY22 CNP of RM60m is much lower than the reported NP of RM102m due largely to: (a) RM19m disposal gain from the sale of Ladang Kawa to parent Hap Seng Consolidated, and (b) RM15m reversal of deferred tax charge.

Outlook: The world’s two most important vegetable oils, palm and soyabean, should see supply improving seasonally come this 3Q- 4Q - enough to provide some relief to current tightness but probably not sufficient to reverse the imbalance. The edible oils and fats sector is more likely to see meaningful supply improvement in CY23 or beyond. As such, CPO prices should trend down as 2H approaches but prices should stay elevated on the back of several supportive factors:

a) Tightness in the current edible oils and fats market will probably spill over into CY23 even with decent 2H CY22 harvests and some demand destruction arising from high prices and economic slowdown.

b) China is expected to recommence bigger purchases in the coming months as inventory is believed to be low. Also, as it gradually reopen and transit to a post Covid normal, demand for edible oils should also pick up and China is one of the leading users of palm oil.

c) In the event edible oils and fats prices do fall steeply, current high oil and gas prices meant that demand for biofuels is likely to rise thus helping to cushion any sharp drop in edible oils prices.

We are revising up HSPLANT’s average CPO price from RM4,300/MT for FY22 to RM5,000/MT and from RM3,500/MT for FY23 to RM4,000/MT. Aside from stronger CPO prices, fruit production is also expected to pick up by about 5% YoY. Despite having paid dividends of 15.5 sen or RM124m just before the end of 1QFY22, the Group managed to end March 2022 with net cash of RM357m, down slightly (- 3% QoO) compared to end Dec 2021.

We continue to like HSPLANT for its capacity to pay dividends. Compared to peers, it has one of the most “liquid” balance sheets i.e. excess cash considering the size of its operations and FY22-23 cash flows are set to remain strong on healthy palm oil prices. Although the Group is seeking to expand its operation, price disparity between prospective buyers and sellers is wide (20-30% differential), hence we still expect good dividends over FY22-23. Maintain OUTPERFORM but on higher TP of RM3.30 based on a blended FY22-23 NDPS on 5% dividend yield.

Source: Kenanga Research - 26 May 2022