Weaker CPO prices, higher production costs seen to impact Hap Seng Plant

This article first appeared in The Edge Financial Daily, on November 23, 2018.
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Hap Seng Plantations Holdings Bhd
(Nov 22, RM1.74)
Maintain sell at a lower target price (TP) of RM1.60:
Hap Seng Plantations Holdings Bhd reported a lower cumulative nine months ended Sept 30, 2018 (9MFY18) revenue of RM294.7 million (-24.7% year-on-year [y-o-y]), while profit before tax (PBT) declined by 76.9% y-o-y to RM27.2 million.

The decline in revenue was mainly caused by lower average selling prices (ASPs) and sales volumes of crude palm oil (CPO) and palm kernel (PK).

The 9MFY18 earnings before interest, taxes, depreciation and amortisation (Ebitda) margin declined to 25.2%, down 17.2 percentage points (ppts) y-o-y, due to lower CPO and PK prices, as well as higher operating costs.

After excluding one-off items, Hap Seng Plant’s 9MFY18 core net profit (CNP) dropped by 78.7% y-o-y to RM16.3 million, accounting for 25.4% of our previous FY18 forecast and 27.5% of the street’s forecast.

This was below our expectation, attributable to the weaker-than-expected Ebitda margin.

Hap Seng’s third quarter ended Sept 30, 2018 (3QFY18) revenue declined by 39.2% quarter-on-quarter (q-o-q) to RM65.6 million and reported a loss before tax (LBT) of RM2.4 million versus PBT of RM7.2 million in 2QFY18.

CPO’s ASP for the quarter declined to RM2,217 per tonne while PK’s ASP increased slightly to RM1,827 per tonne.

CPO and PK sales volumes declined by 38.4% and 8.8% q-o-q, respectively, to 23,279 tonnes and 6,742 tonnes. After excluding one-off items, Hap Seng Plant reported a CNP of RM1.4 million in 3QFY18 versus a core net loss of RM3.3 million in 2QFY18.

We have cut our FY18 to FY20 core earnings per share (EPS) forecasts by 38% to 63% mainly to account for the weaker-than-expected 9MFY18 results given the weaker CPO prices and higher production costs.

Due to the earnings forecast revisions and despite a higher target price-earnings ratio (PER) of 24 times (based on Hap Seng Plant’s five-year mean; previously 15 times based on a 30% discount to the sector’s earlier 2019 estimate (2019E) average PER of 22 times applied to our 2019E core EPS), we lower our 12-month TP to RM1.60. We maintain our “sell” rating. — Affin Hwang Capital Research, Nov 22