Hap Seng Plantations - a Decent End to FY23

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Price Call: 
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+0.02 (1.06%)

HSPLANT’s FY23 results beat our forecast but met market expectation. Its 4QFY23 adjusted core profit nearly doubled QoQ on lower costs and stronger-than-expected FFB production. We raise our FY24F net profit forecast by 3%, lift our TP by 11% to RM1.90 (from RM1.70) but maintain our MARKET PERFORM call.

HSPLANT’s FY23 core net profit of RM90m (excluding RM1m one-off gains) beat our forecast by 7% but met market expectation. The variance against our forecast came largely from lower costs.

YoY, its FY23 top line declined 18% because of a 29% dip in CPO prices offset by a 9% uptick in FFB output. Its core net profit plunged by a sharper 56% due to tighter margins on higher FY23 input costs.

QoQ, its 4QFY23 core net profit almost doubled QoQ on easier cost and stronger-than-usual harvest which rose sequentially to 0.181m MT (+14% QoQ, +2% YoY), partially eroded by 4QFY23 CPO price that softened to RM3,800 per MT (-3% QoQ, -5% YoY).

HSPLANT ended FY23 with net cash of RM464m (+6% YoY).

However, declared final dividend of 5.3 sen meant full-year FY23 DPS amounted to only 6.8 sen, down by 43% YoY but close to our estimate of 7.0 sen.

CPO prices should stay firm going into FY24. Global edible oils supply-demand in 2024 should stay fragile, more so than even last year.

Demand is reverting back to 3%-4% YoY trend line growth. However, supply growth is shaky as SE Asian oil palm production could be entering a secular slow-down. We are keeping our forecast sector CPO prices at RM3,800 per MT over 2024-25 but as HSPLANT historically enjoys premium for its certified palm oil, the assumed CPO price for HSPLNT is closer to RM4,000.

We expect easier production costs ahead thanks to: (a) CPO selling prices holding firm, (b) easier fertiliser and energy costs, and (c) relatively steady yearly FFB harvest of 640k MT for FY24-25. Palm kernel prices are also expected to bottom out with possible modest uptick as buyers re-stock even as underlying demand is set to stay soft.

Forecasts. We raise our FY24F net profit forecast by 3%.

Valuations. Correspondingly, we lift our TP by 11% to RM1.90 (from RM1.70) based on 16x forward PER, which is in line with the 6-month average for smaller plantation companies. We are also introducing a flattish FY25F CEPS of 12.2 sen (+1.2% YoY). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 2). We maintain an annual NDPS of 7.0 sen.

Investment case. The long-term investment case for HSPLANT is one of 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. Maintain MARKET PERFORM.

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 - 28 Feb 2024

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