HSPLANT’s analyst briefing suggests flattish YoY FY22 earnings before moderating in FY23, still robust though below record FY21 levels at above historical levels. CPO prices are expected to soften but so is production cost while harvest should improve moving forward. Our earnings direction is in line with the guidance but we nudge up FY22F/FY23F core EPS slightly by 2%/2% whilst keeping our TP of RM2.50 and OUTPERFORM call given its cash flow-rich upstream operations, huge net cash position and attractive dividend yields.

We came away from HSPLANT’s analyst briefing last Friday feeling assured on the following key takeaways.

1. CPO price is softening but HSPLANT should continue to enjoy premium prices moving ahead. Although the group achieved better-than-average CPO prices in 3QFY22, more “normal” CPO prices are likely in 4QFY22 and FY23. Nevertheless, HSPLANT’s sale of mostly certified palm oil with lower FFA (free fatty acid) level should continue to enjoy a small premium over market prices. The guidance is for average FY22-23 CPO price of RM5,500-4,000 per MT which is in line with our price trend forecast and comparable to our assumed prices of RM5,300-4,100 per MT.

2. Easier production costs post 3QFY22. Having seen higher fertiliser cost and lower output pushing up unit cost in 3QFY22 to RM3,040 per MT of CPO, HSPLANT expects production cost to decline moving into FY23. The group has tendered for enough fertiliser to cover the first half of next year at prices 10-15% below FY22’s. Coupled with expectation of higher output, HSPLANT expects overall production cost of RM2,600 per MT CPO for FY22 to abate to RM2,300 in FY23, slightly lower than our estimated production cost of RM2,700 and RM2,500 respectively.

3. FFB output. Heavy rain affected harvest and fruit evacuation in 3QFY22 at the group’s estates and the situation has not changed thus far in 4QFY22. As such, HSPLANT is no longer expecting stronger YoY FFB output for FY22 but guiding for flattish YoY output of 580K MT. However, fruit production can potentially reach 670K MT in FY23. Accordingly, we are nudging our FY22 estimated FFB output from 567K to 580K MT and from 595K MT to 630K for FY23.

Minimal adjustment to core EPS of 2% for both FY22/23F, from 27.8 sen to 28.2 sen for F22 and for FY23 from 20.6 sen to 21.0 sen. No change to expected NDPS of 18.0 sen for FY22 and 13.0 sen for FY23.

Maintain OUTPERFORM and TP of RM2.50 based on FY23F CEPS at 12x PER, which is at a 20% discount to our integrated peers’ target rating of 15x. The main investment criteria for HSPLANT are: (i) highly cash-generative upstream-centric oil palm operations, (ii) solid net cash balance sheet (RM433m net cash), and (iii) a good history of dividend payout. Given the cash surplus, the group is open to acquisition but is likely to remain very selective given its past record. ESG rating of 3-star is comparable to peers thus no premium has been factored into our valuation/rating consideration.

Risks to our call include: (i) weather impact on edible oil supply, (ii) unfavourable commodity prices fluctuations, and (iii) production cost inflation.

Source: Kenanga Research - 29 Nov 2022