HSPLANT’s FY22 results disappointed as weaker CPO prices and elevated cost in 4QFY22 overwhelmed healthy FFB production. We cut our FY23F net profit by 9%, reduce our TP by 8% to RM2.30 (from RM2.50) but maintain our OUTPERFORM call given its cash flow-rich upstream operations, huge net cash position and still decent dividend yields.

Negative surprise. FY22 core net profit of RM204m (+2% YoY) came 9% below our estimate and 8% under consensus expectation due to a weak 4QFY22. FY22 saw average CPO price of RM5,530/MT (+25% YoY) even as FFB production of 0.583m MT was just a tad lower (-2% YoY) despite strong 4QFY22 harvest of 0.177m MT (+26% QoQ, +7% YoY). Average CPO price in 4QFY22 was weaker at RM4,019/MT (- 23% QoQ, -21% YoY), dampening both 4QFY22 and FY22 earnings. Net cash inched up only marginally from RM433m in Sept 2022 to RM438m in Dec 2022.

Lower dividend. Disappointingly, a final dividend of only 7.0 sen was declared, bringing full-year NDPS to just 12.0 sen, 29% below the 17.0 sen declared for FY21. We had expected 17.0 sen for FY22 as well.

CPO prices outlook: After a record 2022, lower palm oil prices is likely in 2023 as supply improves. Sizeable Latin American soyabean harvest is already underway despite some weather setback in Argentina. However, range-bound CPO prices of RM3,500-4,000 per MT is expected over 2023 as edible oil demand is likely to recover further on the still on-going post-Covid normalization, China’s recent relaxation of its zero-Covid policy, and growing biodiesel demand. Indonesia, the world’s third largest biodiesel market (c10m MT a year), has recently raised its bio-diesel blend from B30 to B35 on 1 Feb 2023. Consequently, another 1-2m MT of palm oil it is likely to be mopped up by Indonesia per annum until the next target at B40 is set.

FY23-24F earnings. Earnings are expected to trend down after FY22 due to easing palm oil prices and higher production costs. Average CPO prices of RM3,800/3,500 per MT are expected over 2023-24 but thanks to the group’s high proportion of certified palm oil, HSPLANT should enjoy respective average CPO prices of RM4,200/3,900 per MT over FY23-24. Cost-wise, recent fertiliser price may have eased 15%-20% from the peak in Apr 2022 but 2022 average price is still higher by 70% YoY and more than triple the price in 2020. We tone down FY23F core EPS by 9% to 19.2 sen and introduce FY24 EPS of 18.5 sen. FY23F NDPS is also revised down from 13.0 sen to 12.0 sen.

Maintain OUTPERFORM for its: (i) cash-generative upstream focus, (ii) strong net cash of RM438m, and (iii) decent dividend payout record. M&A expansion cannot be ruled out either as the group is open to acquisition but on very selective basis. The lower TP of RM2.30 (vs. RM2.50 previously) is based on FY23F CEPS at 12x PER, which is at a 20% discount to our integrated peers target rating of 15x. 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) fluctuating commodity prices, and (iii) production cost inflation.

Source: Kenanga Research - 23 Feb 2023