Kenanga Research & Investment

Hap Seng Plantations - Lower Cost Boosts Sequential Earnings

Publish date: Tue, 21 Nov 2023, 09:26 AM

HSPLANT’s 9MFY23 results met our expectation but disappointed the market. Its 3QFY23 core net profit jumped 86% QoQ underpinned by steady CPO prices and lower costs which lifted margins. We maintain our forecasts but tone down our TP by 6% to RM1.70 (from RM1.80). Maintain MARKET PERFORM.

HSPLANT’s 9MFY23 core net profit (excluding RM11m fair value gains) met our expectation at 72% of our full-year forecast but disappointed the market at only 65% of the full-year consensus estimate. As is the usual practice for HSPLANT which only pay half yearly dividends, no dividend was declared for this 3Q.

Its 3QFY23 core net profit (excluding RM17.7m fair value gains) recovered from a very weak 2QFY23 largely on better margins and FFB harvest of 0.159m MT (+12% QoQ, +13% YoY). An average CPO price realised of RM3,924 per MT (-1% QoQ, -25% YoY) was essentially flat QoQ; hence, better margins came from lower unit costs, thanks to higher FFB output and lower cost. About 40% of the full year’s manuring was applied in 2QFY23 and at old fertiliser prices which were 20%-30% higher than current fertiliser prices.

CPO prices should stay firm going into FY24. Global edible oils supply-demand in 2024 should stay fragile, more so than even 2023. Demand is reverting back to 3%-4% YoY trend line growth. However, supply growth is shaky due to current dry weather affecting Brazilian soya planting while SE Asian oil palm yields are affected by ageing trees. We are keeping sector CPO prices at RM3,800 per MT over 2023-24 but as HSPLANT historically enjoys premium for its certified palm oil, the assumed CPO price for HSPLNT is closer to RM4,000 for FY23-24.

Keeping FFB estimate at 660k MT. HSPLANT is aiming for 690k MT of FFB this year. We doubt this is achievable as 10-month FFB output is only 0.519m MT and harvest is peaking in Oct or Nov. Unless Nov and Dec production accelerates 20% MoM, HSPLANT is more likely to end up with 640k-660k MT, hence we are keeping our 660k estimate.

Easier production costs ahead thanks to: (a) the impact of the May 2022 minimum wage hike of 25% flattening out, (b) easier fertiliser and energy costs since 1Q this year as well as (c) higher FFB production, not just from QoQ seasonal effect but also better YoY yields.

Forecasts. Maintained.

However, we tone down our TP by 6% to RM1.70 (from RM1.80) as we rationalise our valuation basis to 16x forward PER, in line with the 6- month average for smaller plantation companies (from 0.7x P/NTA previously). There is no adjustment to our TP based on ESG given a 3- star rating as appraised by us (see Page 2). We maintain an annual NDPS of 7.0 sen.

The long-term investment case for HSPLANT is one of defensiveness: (i) a highly cash-generative upstream-centric oil palm operations, (ii) solid net cash position of RM415m, and (iii) decent dividend track record, though near-term cost management need to be addressed. Maintain MARKET PERFORM.

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 - 21 Nov 2023

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