This article first appeared in The Edge Financial Daily on December 23, 2019

Hap Seng Plantations Holdings Bhd
(Dec 20, RM2)
Maintain buy with a higher target price (TP) of RM2.14: We reiterate our positive view on Hap Seng Plantations Holdings Bhd’s (HSP) near-term earnings outlook, on the back of improving palm oil price sentiment and mild fresh fruit bunch (FFB) production growth.

HSP’s net profit plunged 98.8% to RM300,000 in the first nine months of financial year 2019 (9MFY19), due mainly to lower realised palm product prices (crude palm oil [CPO]: -16.1%; palm kernel [PK]: -36.6%). We expect its earnings performance to improve significantly from the fourth quarter (4QFY19) onwards, driven mainly by the sharp recovery in CPO prices since October 2019. Based on our estimates, every RM100 per tonne change in our CPO price assumption will change our financial year 2020 (FY20) net profit forecast by RM11.6 million (or 21.2%).

FFB output grew 6% to 617,600 tonnes in 11M19, and the management guided that it remains on track to achieve its FFB output growth guidance of 681,000 tonnes in FY19. Despite having anticipated palm tree stress (which will have an impact on its FFB output, the management feels confident that FFB output will remain on uptrend in FY20 (albeit at a slightly milder growth rate of 3%), supported by an additional 1,000ha of planted area moving into mature bracket. In our forecasts, we are projecting FFB production to grow by 3.7% and 2.1% to 681,500 to 695,500 tonnes respectively in FY19-20.

Despite lower PK credit, CPO production cost declined by 2% to RM1,559 per tonne in 9MFY19, due to higher CPO production. The management guided that CPO production cost will remain at below RM1,600 per tonne in FY20, after having reflected higher fertiliser cost.

We understand that replanting activities will slow to 500-600ha in FY20 (from 1,000-1,100ha in FY19) before normalising back to around 1,100ha from FY21 onwards.

We understand that HSP is currently constructing its third biogas plant, and target for commissioning by end-FY20. Apart from offering energy cost savings, the commissioning of the biogas plant will generate a tax credit of RM5 million to RM5.5 million to HSP (which we expect to be utilised by FY20-21, hence resulting in lower effective tax rate).

We trim our FY19 net profit forecast by 32.5%, mainly to account for higher CPO production cost assumption. We raise our FY20-21 net profit forecasts by 1.8-7.3%, mainly to account for lower effective tax rate assumption (arising from the completion of the second biogas plant).

We maintain our “buy” rating on HSP with a higher TP of RM2.14 (from RM1.68 previously), as we raise our net profit forecasts, roll forward our valuation base year (from FY20 to FY21), and shift our valuation methodology to sum-of-parts (SoP) valuation (from price earnings [PE] multiple previously, to better reflect HSP’s net cash position in our valuation methodology). Our SoP valuation on HSP comprises (i) 25 times FY21 earnings per share of 7.9 sen (in line with our target PE multiple for mid-cap upstream planters), and (ii) projected 14.1 sen net cash balance in FY19. — Hong Leong Investment Bank Research, Dec 20