Kenanga Research & Investment

Hap Seng Plantations - Buoyed by Lower Production Cost

Publish date: Wed, 29 May 2024, 10:48 AM

HSPLANT’s 1QFY24 results met our expectation but disappointed the market. Its 1QFY24 core net profit rose 6% YoY as lower production cost and better palm kernel prices more than offset weak CPO prices and FFB production. We maintain our forecasts, TP of RM2.00 and MARKET PERFORM call.

HSPLANT’s 1QFY24 core net profit of RM21.7m (excluding RM15m fair value gains and RM0.3m disposal loss) came in at only 21% and 19% of our full-year forecast and the full-year consensus estimate, respectively. We consider the results within our forecast (given the low FFB harvest temporarily ahead and during the festive period, which should have started to pick up thereafter) but disappointed the market.

No dividend was declared for the first quarter as usual.

YoY, its 1QFY24 revenue eased 0.6% on a 2% lower average CPO price realised of RM4,023/MT and a 5% fall in FFB production to 0.149m MT. However, its core net profit rose 6% thanks to lower production cost and a 7% rise in average palm kernel price realised (of which sales proceeds were used to offset CPO production cost).

QoQ, its 1QFY24 top line eased 9% largely due to a 17% decline in FFB production to 0.149m MT, partially cushioned by a 6% rise in average CPO price realised to RM4,023/MT. Its core net profit plunged by a sharper 44% due to loss of operating scale and a higher effective tax rate.

Outlook. We expect firm CPO prices in FY24 as global edible oils supply-demand in 2024 looks to stay fragile, with slightly tighter inventory levels expected. Trend line YoY demand growth of 3%-4% is likely but supply growth is expected to hinge only on soya as flattish palm oil along with rapeseed and sunflower harvests are expected for this vegetable oil season. Therefore, we maintain our sector CPO price of RM3,800 per MT for CY24-25 but RM4,000 for HSPLANT as it historically enjoys premium prices for its certified palm oil.

Meanwhile, production cost is likely to stay easier thanks to: (a) lower fertiliser and energy costs, and (b) FFB harvest anticipated to improve by 5% to 0.670m MT for FY24-25 and palm kernel (PK) prices appear to be bottoming out with HSPLANT already reporting better PK price of RM2,329 per MT (+9% QoQ, +7% YoY0 in 1QFY24. Higher sales for PK, a byproduct of milling CPO, will thus help contain overall CPO cost further.

Forecasts. No change.

Valuations. We also maintain our TP of RM2.00 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 maintain an annual NDPS of 7 sen.

Investment case. HSPLANT’s investment case is one of sustainable income yield and defensiveness on the back of: (i) highly cash- generative upstream oil palm operations, (ii) strong net cash position, and (iii) decent dividend track record. However, valuations are fair at the current level. 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 - 29 May 2024

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