Investment Highlights

• We maintain BUY on Hap Seng Plantations (HSP) with a lower fair value of RM2.15/share vs. RM2.20/share previously. Our fair value for HSP is based on a FY24F PE of 15x, the 5-year mean of small cap planters, while we have reduced HSP’s FY24F net profit by 4% to account for lower gross profit margin. We ascribe a 3-star ESG rating to HSP.

• HSP’s annualised 1QFY23 net profit was 13% below our earlier forecast and 27% below consensus. The group’s results fell short of our expectations due to lower-thanexpected gross profit margin and a higher-than-estimated effective tax rate. We have reduced HSP’s FY23E net profit by 10% to account for this.

• HSP’s net profit dived by 68.8% YoY to RM23.4mil in 1QFY23 as lower CPO prices and higher costs offset the positive impact of higher production.

• Average CPO price realised shrank to RM4,088/tonne in 1QFY23 from RM6,019/tonne in 1QFY22 while average palm kernel price slid to RM2,182/tonne from RM4,702/tonne.

• On a positive note, HSP’s FFB production expanded by 14.5% YoY in 1QFY23 as the lagged impact of 2019 drought dissipated. Being a small planter, HSP does not face a significant shortage of labour.

• HSP’s average CPO price realised of RM4,088/tonne in 1QFY23 was marginally higher than MPOB’s average price of RM3,997/tonne for Sabah. We attribute HSP’s higher CPO price to the RSPO premium and low FFA (free fatty acids) levels.

• Comparing 1QFY23 against 4QFY22, HSP’s net profit improved by 24.1% due to higher sales volume of CPO. Sales volume of CPO rose by 12.8% QoQ to 33,906 tonnes in 1QFY23. Average realised CPO price inched up to RM4,088/tonne in 1QFY23 from RM4,019/tonne in 4QFY22. Average palm kernel price was RM2,182/tonne in 1QFY23 vs. RM2,245/tonne in 4QFY22.

• HSP is currently trading at a decent FY24F PE of 13x, lower than the 5-year mean of 15x for small planters, and offers a good dividend yield of 5%.

Source: AmInvest Research - 25 May 2023