Hap Seng Plantations - Higher FFB Guidance

Date: 
2024-03-01
Firm: 
KENANGA
Stock: 
Price Target: 
2.00
Price Call: 
HOLD
Last Price: 
1.85
Upside/Downside: 
+0.15 (8.11%)

HSPLANT guided for: (i) CPO prices staying sideway and firm at RM4,000/MT in FY24, (ii) easier cost of production, and (iii) higher FY24 FFB production. We raise our FY24-25F net profit forecasts by 6% and 8%, respectively, lift our TP by 5% to RM2.00 (from RM1.90) but maintain our MARKET PERFORM call.

We came away from HSPLANT’s results briefing feeling mildly positive. The key takeaways are as follows:

1. It guided for FY24 CPO prices to stay flattish at circa RM4,000 per MT. This is in line with our CY24-25 CPO estimates for the group even though our expectation for the sector is RM3,800 per MT. This is because the group historically enjoys a premium for its RSPO-certified palm oil. As such, we are not changing our CPO price assumptions for HSPLANT.

2. Aiming for FY24 FFB growth of 10%. The group guided for FFB harvest of 0.7m MT for FY24 which translates to a 10% YoY increment in harvest on the expectation of: (a) inclement weather – current heavy rainfall in Sabah is seasonal and not abnormal, (b) no labour issue which the group never suffered any even in the past 2-3 years, and (c) rising FFB yields from 19.7mt per Ha in FY23 to 21.9mt per Ha in FY24 with no expansion in area due to the estates fruiting cycle. Given our FFB estimates of 0.64m MT for FY24-25 we are revising up our FFB output but to only 0.67m MT in FY24 before touching 0.7m MT in FY25.

3. Some YoY easing in production cost likely. HSPLANT indicated that FY23 CPO cost ended flattish, up slightly from RM2,559 a year ago to RM2,562 per MT. Moving forward, the group expects CPO production cost to fall, possibly to as low as RM2,200 per MT if FFB output of 0.7m MT is achieved in FY24. We maintain a higher CPO production cost estimate of between RM2,400-2,500 per MT over FY24-25.

Forecasts. We raise our FY24-25F net profit forecasts by 6% and by 8%, respectively.

Valuations. Correspondingly, we also lift our TP by 5% to RM2.00 (from RM1.90), using the same valuation basis of 16x forward PER, being the 6- month average for smaller plantation companies. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). We also maintain an annual NDPS of 7.0 sen.

Investment case. The long-term investment case for HSPLANT is one of defensiveness: (i) a highly cash-generative upstream-centric oil palm operations, (ii) solid net cash position of RM415m, and (iii) decent dividend track record, though near-term cost management need to be addressed. 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 - 1 Mar 2024

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