HSPLANT’s 1HFY24 core net profit doubled YoY and exceeded expectations, thanks to higher CPO and PK prices even as FFB output dipped. Likewise, 2QFY24 core results were also lifted by sturdy commodity prices and lower costs, which is expected to persist and thus we raised FY24-25 forecasts by 14% and 10%, respectively, and call to OUTPERFORM (from MARKET PERFORM) with a higher TP of RM2.30 (from RM2.00).

1HFY24 core net profit surged 113% YoY to RM66.8m after excluding gains from fair value (RM2m) and net disposal (RM0.3m), coming in at 65% and 60% of Kenanga’s and consensus full-year forecasts, respectively. Whilst it is doubtful HSPLANT can meet its FFB target of 0.7m MT for FY24 given the weak first half FFB output (-3% YoY), 1HFY24 production cost still managed to come in lower than expected despite the smaller harvest. Following the sturdy first half earnings, HSPLANT continued to declare an interim dividend of only 1.5 sen (flat YoY), still within expectation. However, we are raising full- year DPS for FY24 and FY25 DPS from 8.0 sen to 9.0 in view of strong results thus far and higher net cash of RM528m (+12% QoQ).

2QFY24 net profit dipped QoQ, distorted by a RM15m fair value gain in the first quarter. Otherwise, revenue and core profit rose QoQ as well as YoY. CPO price strengthened to RM4,247 per MT (+6% QoQ, +7% YoY) and PK prices increased to RM2,524 per MT (+8% QoQ, +16% YoY) which more than compensated for lower 2Q harvest of 0.140m MT (-6% QoQ, -1% YoY).

Outlook. CPO prices should stay firm on fragile global edible oils supply-demand prospects. Demand looks set to grow by 3%-4% YoY but supply is expected to struggle growing at similar pace. Inventory levels are thus set to trend down over this year and next, albeit staying manageable. This is supportive of edible oil prices staying firm. We maintain our sector CPO price of RM3,800 per MT for 2024-25 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 lower fertiliser and energy costs as well as improving PK prices.

Forecasts. We are adjusting up FY24-25F core EPS by 14% and 10%, respectively on lower-than-expected costs and better PK prices.

Valuations. We are raising our TP by 10% from RM2.00 to RM2.30 based on 16x forward PER, which is in line with the 6-month average (as well as 3-year) 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 raised our annual NDPS from 8 sen to 9 sen for FY24 and FY25.

Investment case. Upgrade HSPLANT from MARKET PERFORM to OUTPERFORM given its 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.

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 - 27 Aug 2024