Maintain OUTPERFORM and TP of RM2.50. HSPLANT ended FY22 on marginally weaker FFB production but stronger CPO price. CPO prices should soften in FY23 but stay firm while FFB output is also expected to inch up. Maintain FY22-23F core EPS and we continue to like the group’s cash generative upstream operations, net cash position and attractive yields.

Strong year-end harvest, as guided. HSPLANT ended FY22 with FFB output of 177K MT in the final quarter, up 26% QoQ and 7% YoY. 4QFY22 was thus the best quarter in terms of FFB and CPO output for the group in 2022. However, this is in line with: (a) historical trend as the group oftens enjoy better FFB production in the fourth quarter, and (b) the group’s guidance of full-year FY22 FFB output of 580K MT (versus actual of 583K MT).

Acquisition is needed for stronger FFB uplift. We are maintaining FFB production of 630K MT come FY23 on improving yields. Without any new land bank or acquisition, FY23 harvest will largely be determined by the yield cycle of the trees, weather and labour as 88% or 35K Ha out of the group’s 40K Ha is already planted, with the remaining area occupied largely by infrastructure. Acquisition cannot be dismissed given the group’s sizeable cash surplus but asking prices are still quite high. An additional consideration for any acquisition is also whether the target estate and/or mill is certified or certifiable as HSPLANT is an established supplier of RSPO certified palm oil.

Range bound prices for palm oil. CPO is expected to trade between RM3,500-4,000/MT over 2023 to average at around RM3,800. However, expected CPO price for HSPLANT is RM4,100/MT in FY23 due largely to the premium the group enjoys from selling RSPO certified palm oil.

Cost pressures may ease but still high. After peaking in April 2022, IMF fertiliser price index has declined by 17% as of Dec 2022 but is still 8% higher YoY and more than 3x above the level in Dec 2020. Similarly, fuel cost remains high despite some easing while wages have been trending up. For unit cost, the prospect of higher FFB production should cushion some of the cost inflation but we stay cautious as upward cost pressure remains.

No change to forecast core EPS for FY22 and F23 at 28.2 sen and 21.0 sen, respectively. NDPS of 18.0 sen for FY22 and 14.0 sen for FY23 are also maintained.

Maintain OUTPERFORM and TP of RM2.50 based on FY23F CEPS at 12x PER, which is at a 20% discount to our integrated peers’ target rating of 15x. The main investment criteria for HSPLANT are: (i) highly cash-generative upstream-centric oil palm operations, (ii) solid net cash balance sheet, and (iii) a good history of dividend payout. Given the cash surplus, the group is open to acquisition but is likely to remain very selective given its past record. Even without acquisition, our FY23F core EPS of 21.0 sen is already 14% above consensus, most likely on account of our firmer CPO price expectation as we anticipate recovering demand to absorb much of the projected rise in 2023 supply.

ESG rating of 3-star is comparable to peers with no premium factored into valuation/rating.

Risks to our call include: (i) weather impact on edible oil supply, (ii) unfavourable commodity prices fluctuations, and (iii) cost inflation.

Source: Kenanga Research - 26 Jan 2023