Investment Highlights

• We upgrade Hap Seng Plantations (HSP) to HOLD from SELL with a higher fair value of RM3.05/share. We have raised HSP’s FY23F net profit by 27.7% to account for a higher gross profit margin of 40% vs. 35% previously. Our fair value for HSP is based on an unchanged FY23F PE of 18x. We ascribe a 3-star rating to HSP.

• HSP’s annualised 1QFY22 core net profit was 33.9%above our forecast and 56.7% above consensus estimates. We raise HSP’s FY22F net profit by 15.8% to account for a higher average CPO price of RM5,500/tonne vs. RM4,500/tonne originally.

• HSP’s core net profit (excluding disposal gain of RM18.8mil) jumped by 246.2% to RM82.9mil in 1QFY22 from RM29.4mil in 1QFY21 underpinned by stronger palm product prices and production and a lower effective tax rate.

• Effective tax rate declined to 18.6% in 1QFY22 from 25.2% in 1QFY21 as capital gains from the disposal of an asset were taxed at lower real property gains tax rate. Also, there were reversals of deferred tax provisions in 1QFY22.

• Average CPO price realised grew by 56.2% to RM6,019/tonne in 1QFY22 from RM3,854/tonne. HSP’s average CPO price realised of RM6,019/tonne in 1QFY22 was close to MPOB’s Sabah spot price of RM5,928/tonne.

• FFB production growth was 4.7% YoY in 1QFY22. We believe that industry FFB production in Sabah was weak last year due to the floods. Also, some estates were still affected by the lagged effects of 2019’s drought last year.

• Going forward, we believe that HSP’s FFB production would soften in May before picking up again in 2HFY22 due to seasonal factors. We have assumed a FFB production growth of 6.5% for HSP in FY22F.

• Comparing 1QFY22 against 4QFY21, HSP’s net profit improved by 7.8% to RM82.9mil as higher CPO prices compensated for weaker palm production.

• Average CPO price realised increased by 18% to RM6,019/tonne in 1QFY22 from RM5,103/tonne in 4QFY21. Average palm kernel price was RM4,702/tonne in 1QFY22 vs. RM3,762/tonne in 4QFY21. FFB production slid by 17.3% QoQ in 1QFY22.

Source: AmInvest Research - 26 May 2022