Kenanga Research & Investment

Hap Seng Plantations - Cost Still Sticky But Easing

Publish date: Thu, 23 Nov 2023, 10:46 AM

HSPLANT guided for: (i) flattish CPO prices in FY23-24, (ii) slightly lower FFB production in FY23, (iii) marginally lower forward production cost, and (iv) no change to dividend payout policy. We maintain our forecasts, annual dividend of 7.0 sen, TP of RM1.70 and MARKET PERFORM call.

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

1. CPO prices to continue stay around RM4,000 per MT. Following the release of its 9MFY23 results on 20 Nov 2023, we kept the average CPO price of RM3,800 per MT for the sector as prices continued to hold firm thus far despite peak FFB production over Sept/Oct and possibly Nov for this year. 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 HSPLANT, we are retaining our latest CPO price assumption of RM4,000 per MT for the group.

2. HSPLANT is guiding down earlier FY23 FFB target by 5%. The group is now moderating its full-year FY23F output target for FFB from 0.694m MT to 0.659m MT. Nevertheless, this is still a healthy 13% YoY increment. The downgrade reflects cumulative 10-month harvest of 0.519m MT of FFB though 12% higher YoY, it is not high enough to reach the original FFB target of 0.694m MT for FY23. We are maintaining our FY23 FFB estimate of 0.660m MT. Thus far, rainfall in Sabah has been normal to good with no flooding but or drought as well. The impact of El Nino YTD is minimal or mild in HSPLANT’s estates. For FY24, the group is targeting 708k MT, slightly above our estimate of 0.670m MT.

3. Lower production cost ahead. 9MFY23 CPO cost stood at RM2,692 per MT, lower marginally (2%) from 1HFY23 of RM2,752 per MT but still 5% above last year’s 9-month average cost of RM2,556 per MT. Nonetheless, the group is still confident of achieving lower CPO cost of RM2,500 per MT for FY23 on minimal (10%) fertiliser application outstanding in 4QFY23. YTD manuring progress in FY23 thus far has been 20% in 1Q, 40% in 2Q and 30% in 3Q. HSPLANT is also guiding for CPO cost to ease further in FY24 to RM2,400 per MT.

Forecasts. Maintained.

We also keep our TP of RM1.70 based on 16x forward PER which is in line with the 6-month average for smaller plantation companies. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 2). We also 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 - 23 Nov 2023

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