Hap Seng Plantations - Difficult 1QFY23 But Still Good Value

Price Target: 
Price Call: 
Last Price: 
+0.41 (21.69%)

HSPLANT’s 1QFY23 results disappointed. Its realised CPO prices were firm QoQ but weaker YoY which was expected while FFB  output was strong. However, margins were still capped by high production cost. We cut our FY23-24F net profit forecasts by 31%  and 30%, respectively, but maintain our TP of RM2.30 based on  0.9x FY24F P/NTA and OUTPERFORM call. Its dividend yield is decent at 5%.

HSPLANT’s 1QFY23 core net profit disappointed, coming in at only  15% and 19% of our full-year of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from lower-than-expected CPO prices realised.

Strong start. 1QFY23 core net profit of RM23m (-20% QoQ, -61%  YoY) saw firmer QoQ CPO price of RM4,088/MT (+2% QoQ) but down 32% YoY due to very strong CPO prices last year. The group’s  1QFY23 FFB production of 0.156m MT was strong, rising 15% YoY though still seasonally down by 12% QoQ. Nonetheless, margin stayed tight due to the convergence of high production cost amidst a  seasonally low fruiting season. Cost pressure should ease in 2HFY23  as lower fertiliser prices coincides with peak harvesting season. Net cash fell a little, from RM438m in Dec 2022 to RM412m as at 31 March  2023 after paying FY22’s final dividend of RM56m in Jan 2023. No first-quarter dividend was declared, which is the norm for HSPLANT.

CPO price outlook: Expectations of a sizeable Latin American soybean surplus did not materialise due to poor Argentinian harvest.  However, global edible oil supply is still improving in 2023, just not as much as estimated. Demand is also recovering and should absorb most of the increase in supply. Jan-Mar 2023 palm oil exports from  Indonesia, Malaysia and Thailand surged 23% YoY on strong Chinese buying which more than doubled YoY, from 0.6m MT a year ago to  1.6m MT while imports from India and EU stayed firm. Demand for palm oil demand has since weakened as the lack of storage in Brazil has caused some force selling of soyabean. We suspect this is tailing off and more supportive factor, such as El Nino is emerging as a severe  El Nino often delays flowering in the following season. Saudi Arabia may provide some support if crude oil prices were to fall much further.

We cut our FY23-24F earnings forecasts by 31% and 30%, respectively, as we trim FY23-24F CPO price from RM3,800 per MT to RM3,700.  Cost-wise, fertiliser prices have eased to pre-Russia-Ukraine conflict level in 2021. However, the 2021 price levels are still double that of 2020  and nearly 30% above the 10-year average. So, while cost may be plateauing, it is still high by historical measure. Nevertheless, earnings should recover, albeit slight moving into FY24. Despite the earnings downgrade, we are keeping our annual NDPS forecast at 12.0 sen over  FY23-24.

Maintain OUTPERFORM. We like HSPLNT for several reasons namely: (i) cash-generative upstream focus, (ii) strong net cash of  RM412m, and (iii) decent dividend payout record. M&A expansion cannot be ruled out either as the group is open to corporate opportunities. Despite the earnings downgrade, our TP is maintained at RM2.30 based on FY24F 0.9x P/NTA which also translates to a  dividend yield of 5%. ESG rating of 3-star is comparable to peers; thus, no premium has been factored into our valuation/rating consideration.

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

Source: Kenanga Research - 25 May 2023

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