Kenanga Research & Investment

Hap Seng Plantations - Navigating Challenging Environment

Publish date: Mon, 28 Aug 2023, 10:56 AM

HSPLANT’s 2QFY23 results briefing guided towards a 2HFY23 with: (i) a flattish CPO price, (ii) higher seasonal harvest, (iii) lower production cost, and (iv) no change to its annual 60% dividend payout policy. We maintain our forecasts but cut FY23-24F dividend to 7.0 sen each (from 10.0 sen). We keep our TP of RM1.80 and MARKET PERFORM call

We came away from HSPLANT’s results briefing feeling neutral. The key takeaways are as follows:

1. CPO prices to stay rangebound, between RM3,500 to RM4,000 per MT. Following the release of the 2QFY23 results recently, we have raised the average CPO price back to RM3,800 per MT for the sector from RM3,700 as prices have been holding well thus far even as FFB production nudges higher towards a peak in Sept/Oct (possibly Nov). Historically, HSPLANT enjoyed a price premium for its RSPO certified palm oil compared to the sector average, thus its average CPO price should be closer to RM4,000 per MT for FY23- 24. As this is within the range guided by HSPALNT, we are retaining our latest CPO price assumption of RM4,.000 per MT for the group.

2. HSPLANT maintains its bullish earlier FY23F FFB target. The group had been guiding towards full-year FFB output of 0.690m MT for FY23 which represent an 18% YoY jump. HSPLANT still maintain this production target for FY23. Thus far, cumulative harvest from Jan – July 2023 has reached 0.347m MT or 14% higher YoY. We have nudged our FY23F FFB output a little from 0.650m MT to 0.660m MT in our recent results note, so our new estimate is now within 5% of the group’s target. Note that HSPLANT’s target does assume good palm yields, workforce efficiency and kind weather condition to continue for the rest of the year. Thus far, rainfall in Sabah has been good despite threat of an El Nino later in the year, consistent with feedback from other Sabah planters.

3. Lower production cost by 2HFY23. 1HFY23 CPO cost stood at RM2,752 per MT, 20% above the last first half average of RM2,297 per MT. QoQ, 2QFY23 moderated just under 1% to RM2,740 per MT, essentially flat. However, the group is confident of achieving lower CPO cost of RM2,500 per MT for full year to FY23. This is higher than previous guidance of RM2,300 per MT for FY23 but is in line with our expectation as we recently hike its CPO cost up by 8%. The company also indicated that about 60% of the FY23 fertiliser target had been applied in 1HFY23 with about 40% done during 2QFY23 alone which contributed to the higher cost seen in that quarter. Furthermore, the cost of fertiliser for 2HFY23 should be 20% lower HoH.

Forecasts. Maintained but we cut our FY23-24F dividend to 7.0 sen each (from 10.0 sen) to bring ourselves in line with the group’s 60% payout guidance.

We also keep our TP of RM1.80 based on 0.7x P/NTA, at a 20% discount to its historical average P/NTA of 0.9x given its weak earnings outlook. There is no adjustment our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

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 - 28 Aug 2023

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