This article first appeared in The Edge Financial Daily on May 26, 2017

Hap Seng Plantations Holdings Bhd
(May 25, RM2.61)
Maintain add with an unchanged target price (TP) of RM2.89: Hap Seng Plantations Holdings Bhd's first quarter of financial year 2017 (1QFY17) core net profit grew 105% year-on-year (y-o-y) to RM34 million due to higher selling prices for crude palm oil (CPO) and palm kernel (PK) as well as stronger output. We consider 1QFY17 core net profit to be in line with our and market expectations as it made up 28% of our and 25% of Bloomberg consensus full-year forecasts. We project weaker earnings in future quarters, mainly due to lower CPO prices. As expected, no dividend was declared in 1QFY17.

The average CPO selling price that the company achieved in 1QFY17 rose 38% y-o-y and 12% quarter-on-quarter to RM3,268 per tonne, which is ahead of Sabah’s average CPO price of RM3,114 per tonne. We believe that the higher CPO price could be partly due to the premium pricing achieved for its certified sustainable palm oil. Average PK prices achieved rose 62% y-o-y and 11% q-o-q to RM3,282 per tonne in 1QFY17, mainly due to tight PK and coconut oil supplies.

Fresh fruit bunch (FFB) output rose 7.2% y-o-y in 1QFY17, as FFB yields at its estates recover from the El Nino effect. This was lower than Sabah state’s (where all of its estates are located) achievement of a 15% jump in output. This was because Hap Seng Plantations’ estates were less impacted by the El Nino impact in 2016. The higher average selling price (ASP) for palm products, together with the higher output, contributed to the group’s strong net profit growth for 1QFY17.

The group revealed that palm oil prices declined in April and recovered slightly in early May. However, sentiment in the palm oil market remain subdued due to weak soy oil prices and expectations of higher production. The group expects demand for palm oil to remain strong in the near term, supported by demand during the fasting month, and expects this to lend support to palm oil prices.

We maintain our earnings forecasts and TP of RM2.89, still based on 16 times price-earnings ratio (historical average). We keep our “add” call due to its undervalued plantation assets and attractive dividend yields. At the current share price, the implied enterprise value per hectare for its estates is only RM56,000, below the market price of RM70,000 to RM80,000 for Sabah estates. Key downside risks are lower-than-expected FFB output and ASP for palm products. — CIMB Research, May 24