Per HSPLANT post-results briefing, our FY23F CPO price is a tad higher but our FFB output is slightly lower than guided. Expectation of 10%-15% moderation in unit cost due to some easing in input costs and better harvest volume is in line though. The rationale for lower dividend is not very convincing but pricing in an acquisition at this juncture seems too premature. We maintain our forecasts, TP of RM2.30 and OUTPERFORM call.

Lower CPO price outlook. After enjoying record CPO prices which averaged RM5,530 per MT in FY22, HSPLANT is expecting lower CPO price of around RM4,000 per MT for FY23. This is in line with the general view that CPO will trade range-bound between RM3,500-4,000, slightly below our assumed average of RM4,100.

Higher FFB output. HSPLANT is targeting 693K MT of FFB production for FY23. Considering the limited land available for new planting, the implied FFB yield is about 20-21 MT per Ha. This is not a tall order as it mirrors the group’s 10-year average FFB yield but it suggests an 18% YoY jump over FY22 FFB output of 583K MT. Hence, we prefer to retain our 630K MT estimate which still implies a decent 8% growth.

More moderate cost in FY23. The cost involved to produce CPO was RM2,559 per MT in FY22 as labour, fertiliser and diesel costs soared by between 30%-100% YoY. With easing fertiliser and diesel costs coupled with higher output, HSPLANT hopes to achieve a lower production cost of RM2,300-2,400 in FY23 which is broadly within our expectation.

Expansion vs acquisition. Given the recent cut in final dividend and group’s cash hoard, expansion cannot be ruled out. As the opportunity to buy sizeable undeveloped oil palm land is very limited in Malaysia and only marginally easier in Indonesia, it is more likely that HSPLANT will have to consider acquisitions. Even then, such an acquisition will probably be opportunistic in nature and may involve slow accumulation of suitable estates. However, it appears premature to price in growth from any acquisition at this juncture.

We maintain our forecasts, and NDPS of 12.0 sen for both FY23 and FY24.

Maintain OUTPERFORM and TP of RM2.30 based on FY23F CEPS at 10x 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, and (iii) a good history of dividend payout. Given the cash surplus, the group is open to acquisition but will likely be very selective based on its past record. Even without acquisition, our FY23F core EPS of 19.2 sen is already slightly above consensus, most likely on account of our firmer CPO price expectation as we anticipate recovering demand to absorb much of the projected rise in 2023 supply.

ESG rating of 3-star is comparable to peers with no premium factored into valuation/rating (see Page 3).

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

Source: Kenanga Research - 27 Feb 2023