Kenanga Research & Investment

Hap Seng Plantations - Guidance of Easier 2HFY23 Cost

Publish date: Mon, 29 May 2023, 03:12 PM

HSPLANT’s post-1QFY23 results guidance remains broadly as per a  quarter ago. CPO price is expected to stay rangebound (RM3,500- RM4,000 per MT) but we are upgrading FY23-24F core net profit on a  3% uplift to earlier FFB expectation as well as the lowering of CPO  production cost by 4%. Maintain OUTPERFORM and TP of RM2.30,  which is based on 0.9x Price/NTA for FY24F which is also supported by a decent 5% dividend yield based on TP.

CPO prices are still expected to trade between RM3,500 and  RM4,000 per MT. Whilst keeping to this range, we have moderated our average CPO price expectation for FY23-24F slightly, from RM3,800 to  RM3,700 per MT. As HSPLANT tends to enjoy a premium for its RSPO-certified palm oil, the average CPO price for HSPLNT should be closer to  RM3,900 per MT for FY23-24 (down from RM4,100 previously). Since this has been reflected in our latest results note, there is no change to our CPO price assumption after the briefing.

HSPLANT is also retaining earlier FY23F FFB target. With production visible till mid-May, HSPLANT remains optimistic of reaching its Feb  2023 guidance of 0.690m MT in FFB harvest for FY23, with peak fruiting expected in 4QFY23. 1QFY23 FFB output of 0.156m MT (-12% QoQ,  +15% YoY) was indeed good in spite of the QoQ dip which is seasonal.  Historically, HSPLANT’s first quarter normally suffers a 23% QoQ in FFB  production. Given the robust 1QFY23 harvest and HSPLANT’s confidence of its FY23F harvest, we are revising up our FFB forecast from 0.630m MT to 0.650m MT for FY23 but this is still short of the  0.690m MT target as the forecast imputes in ideal palm yields, workforce efficiency and kind weather condition.

Easier production costs in 2HFY23. 1QFY23 cost of producing CPO  averaged out to RM2,750 per MT or 27% higher YoY. However,  HSPLANT is expecting full-year CPO cost to ease to RM2,300 per MT (vs. our earlier expectation of RM2,400). Labour cost rose 36% YoY as the latest minimum wage hike, from RM1,100 to RM1,500, took effect on  1 May 2022. However, fertiliser cost has fallen and the group has lockedin its 2HFY23 requirement at lower prices. Altogether, HSPLANT expects FY23F fertiliser cost to fall by almost 10% YoY. By FY24, lower diesel consumption is also expected. 60% of the group’s electricity needs in the estates is already provided by two existing bio-gas capture and power generation facilities. A third facility is being constructed and when ready in FY24, the group should be 80% self-sufficient in electricity.

6% and 8% upgrade to FY23-24F core net profit, respectively on 3%  higher FFB output and 4% cut to CPO production cost on lower fertilizer prices, easier diesel prices and less diesel consumption in FY24. Higher  FFB output is also helping to contain rising wages. Maintain FY23-24F  NDPS of 12.0 sen each.

Maintain OUTPERFORM and TP of RM2.30 based on 0.9x FY24F  Price/NTA. The TP also translates to a decent dividend yield of 5%.  However, the main investment case for HSPLANT remains: (a) its highly cash-generative upstream-centric oil palm operations, (ii) solid net cash position of RM412m, and (iii) a good history of dividend payout. The group is also open to acquisition but on very selective basis. 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 May 2023

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