1HFY22 Core Net Profit (CNP) of RM127m surpassed our and consensus expectations by 7% and 10%, respectively. Buoyant CPO prices helped boosted 2QFY22 and 1HFY22 earnings as production was weak. Production should improve come 2HFY22 but probably still lower than earlier expectations while CPO prices should hold firm after correcting by over 30% since June. We are raising FY22/FY23F Core EPS (CEPS) by 10%/5%. A higher-than-expected interim NDPS of 5.0 sen was also declared. Maintain OP but trimming TP from RM3.30 to RM3.00.

Our forecast 1HFY22 CNP of RM127m is materially lower than the reported PATMI of RM169m due to the following notable adjustments: (a) RM11m net disposal gain (RM19m gross less RM8m of tax) from the sale of Ladang Kawa to parent Hap Seng Consolidated, (b) RM15m reversal of deferred tax charge, and (c) fair value adjustment of RM8m.

Nevertheless, 2QFY22 CNP was excellent, underpinned by firm CPO price of RM6,737/MT (+12% QoQ, +54% YoY) which overcame an otherwise softer-than-expected second quarter's FFB output of 0.129m MT (-5% QoQ, -13% YoY). Likewise, strong 1HFY22 CPO price helped offset weak fruit output which dipped by 5% YoY. Compared to earlier expectation of 5% YoY improvement in output for FY22, overall 1HFY22 production thus far has disappointed. Fortunately, HSPLANT managed to register stronger CPO price of around RM6,300/MT in 1HFY22, which more than made up for the production shortfall. All in all, 1HFY22 earnings came in about 52% of our, and 57% of consensus, full-year FY22F earnings.

HSPLANT declared an interim NDPS of 5.0 sen (+233% YoY), much higher than we had expected. Typically, the interim dividend is small as the group prefers to announce the main portion only after the full-year’s results have been achieved. A consideration for the higher-than-expected interim dividend might lie with the group’s net cash position. As at end June 2022, HSPLNT’s net cash stood at RM500m, up 40% QoQ and nearly doubled last June’s net cash of RM257m.

Looking ahead, CPO prices have fallen sharply since June in view of seasonal supply uptrend, aggressive Indonesian selling prompted by limited storage as well as still modest sluggish recovery in demand. However, the pending improvement in supply is not likely to be sufficient to address the current edible oils supply tightness globally. More meaningful supply improvement will probably emerge in 2023, possibly even later if demand recovers stronger than 3-4% YoY. As such, CPO prices are expected to hover at around RM4,000/MT into FY23F. Moreover, elevated fossil fuel prices are helping to feed and sustain a healthy market for biofuels.

We are nudging CPO price forecast from RM5,000/MT to RM5,300/MT for FY22, and for FY23, from RM4,000/MT to RM4,300/MT but revising down fruit production from 5% YoY growth to flat output in FY22. We are also raising our full-year NDPS from 19.0 sen to 20.0 sen but would not rule out a special dividend come end of FY22.

We continue to like HSPLANT for its: (a) pure exposure to upstream oil palm operations, (b) well capitalised position with strong net cash, and (c) good dividend payout record. M&A expansion cannot be ruled out either as the group is open to acquisition but on very selective basis and the price disparity between prospective buyers and sellers is wide (20-30% differential) at the moment. Maintain OUTPERFORM but on lower TP of RM3.00 based on FY23F CEPS at 12x PER, which is at a 20% discount to our integrated peer target rating of 15x.

Source: Kenanga Research - 25 Aug 2022