Hap Seng Plantations Holdings Bhd
(Nov 24, RM2.46)
Maintain buy call with a target price (TP) of RM2.76: Hap Seng Plantations Holdings Bhd (HSP) cumulative nine months ended Sept 30, 2016 (9MFY16) core net profit of RM79.1 million (+33.2%) came in above expectations, accounting for 82% and 78% of our and consensus full-year forecasts respectively.

The deviations are higher-than-anticipated realised crude palm oil (CPO) and palm kernel (PK) selling prices. However, there are no dividends for this quarter, as dividends are usually announced for the second quarter (2Q) and 4Q.

On a quarter-on-quarter basis, the 3QFY16 net profit more than doubled to RM42.7 million (from RM19.8 million in 2QFY16), thanks to a higher realised average selling price of PK (which rose by 10.7% to RM2,669/tonne) and fresh fruit bunch (FFB) production recovery.

Moreover, year-on-year, 3QFY16 net profit jumped 98% to RM42.7 million (higher than the revenue growth of 55.8% recorded during the quarter) mainly due to higher palm product prices and FFB output recovery.

Year to date (YTD), the 9MFY16 net profit rose 33.2% to RM79.1 million due mainly to higher CPO and PK realised selling prices, which more than made up for a slightly lower FFB production (as FFB output only started recovering from the lagged impact of dry weather since 3QFY16.

While HSP’s FFB production may have already peaked in 3QFY16 (as the latest Malaysian Palm Oil Board statistics indicated that FFB production in Sabah has started trending down since October), we believe the strong earnings will be sustained into 4Q, supported by current high palm product prices (CPO spot price has risen by 13% since end-September).

Risks include weaker-than-expected FFB production and a sharp decline in vegetable oil prices.

We raised our FY16 net profit forecast by 18% to RM113.4 million (largely to reflect the higher realised CPO price YTD) and maintained our FY17-18 net profit forecasts as we anticipate CPO prices to normalise from the current high CPO spot price of RM2,950/tonne, as and when more meaningful production recovery takes place (which has already been reflected in our forecast assumptions).

HSP has shown the unique aptitude for keeping costs down while simultaneously capturing high CPO selling prices due to its Roundtable on Sustainable Palm Oil certification which allows it to sell its CPO for a premium of US$30-US$35 (RM134-RM156) to the market rate, which gives it strategic advantages over its competitors.

We maintain “buy” with an unchanged TP of RM2.76 pegged at unchanged 18.5 times price-earnings ratio (PER) of FY17 earnings. A PER of 18.5 times is at the lower end of our PER for the plantation sector and hence represents a somewhat conservative estimate. — Hong Leong Investment Bank Research, Nov 24