Kenanga Research & Investment

Hap Seng Plantations - Poor CPO Price and High Cost Weigh In

Publish date: Thu, 24 Aug 2023, 10:15 AM

HSPLANT’s 1HFY23 results disappointed on poorer CPO prices and higher cost. The group should see better performance in 2HFY23 on firm CPO prices and easier costs. We cut our FY23-24F net profit forecasts by 24-22%, reduce our TP by 22% to RM1.80 (from RM2.30) and downgrade our call to MARKET PERFORM from OUTPERFORM.

HSPLANT’s 1HFY23 core net profit disappointed, coming in at only 28% each of both our and consensus’ full-year estimates. Its 2QFY23 performance was very weak QoQ even though CPO price of RM3,978 per MT dipped only 3% QoQ while second quarter’s FFB output of 0.142m MT (-9% QoQ, +10% YoY) came close to our expectation. Therefore, 2QFY23 cost must have stayed sticky at a higher level than earlier expected. As for the difference of RM1.4m between reported net profit and our CNP, it was mainly due to fair value adjustment. HSPLANT also declared a lower interim 1HFY23 NDPS of just 1.5 sen compared to 5.0 sen for the first half of last year; hence, we are cutting full-year NDPS as well.

CPO prices should stay firm over FY23-24. An already fragile edible oils supply-demand scenario for 2023-24 means there is limited room to absorb bad news - from Black Sea supply disruption to worse-than expected weather development such as a severe El Nino. Our expectation is for CPO price to be slightly firmer at RM3,800 per MT versus previous expectation of RM3,700 per MT for 2023-24. Given that HSPLANT historically enjoys an RSPO premium for its certified palm oil, our assumed CPO price for HSPLNT is now closer to RM4,000 per MT for FY23-24 rather than the RM3,900 we had previously assumed.

Maintain FFB estimate of 650K MT, HSPLANT typically harvest about 45% of its full-year FFB in the first half. This suggests FY23 FFB output of 0.663m MT of FFB given 1HFY23 output of 0.298K MT. Consequently, we maintain our 0.65m MT FFB estimate for FY23.

Easier production costs in 2HFY23. 1HFY23 CPO cost was high due to: (i) 25% increase in Malaysian minimum wage which took effect from May 2022, (ii) fertiliser cost as planters often order fertiliser 3-6 months ahead which means 1HFY23 still chalked the older higher prices, and (c) softer palm kernel (PK) prices and CPO cost computed after netting out the sales proceeds from PK. However, 2HFY23 should see easier cost.

Forecasts. We cut our FY23-24F net profit forecasts by 24-22% as higher FFB output is likely to be offset by elevated production cost. We are also cutting FY23-24F NDPS from 12.0 sen each to 10.0 sen.

We also reduce our TP by 22% to RM1.80 (from RM2.30). Our previous TP was based on 0.9x FY24F Price/NTA but given the poor 2QFY23 results, we are applying a temporary discount of 20% to the valuation. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 2).

The long-term investment case for HSPLANT remains: (i) its highly cash-generative upstream-centric oil palm operations, (ii) its solid net cash position of RM422m, and (iii) excellent dividend payout track record, though near-term cost management need to be addressed. Downgrade to MARKET PERFORM from OUTPERFORM.

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 - 24 Aug 2023

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