Full-year results below expectations for Hap Seng

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Hap Seng Plantations Holdings Bhd
(Nov 13, RM2.60)
Maintain “reduce” with a lower target price (TP) of RM2.45 from RM2.54:
Hap Seng Plantations’ full-year of financial year 2014 (FY14) is likely to be below 
our expectations as costs are higher while own fresh fruit bunch (FFB) production is likely to be lower.

FY14 to FY16 core net profit forecasts are cut by 3% to 10%, and TP lowered to RM2.45. Maintain “reduce”.

Hap Seng Plantations still does not offer superior FFB production growth but dividend yield is expected to remain good. Its nine months of FY14 (9MFY14) core net profit of RM92.4 million accounts for 68% of our full-year FY14 forecast of RM135.8 million (and 72% of consensus) and is hence below our expectations.

Cost of sales is likely to be higher than our estimate while own FFB production growth (an increase of 6.9% in 9MFY14) is likely to be lower.

Year-on-year (y-o-y), 9MFY14 core net profit is 60% higher mainly due to higher sales volumes and selling prices of crude palm oil (CPO) and palm kernel (PK), especially in the first half of FY14.

Compared to the third quarter of FY13 (3QFY13) and 2QFY14, 3QFY14 core net profit of RM23.5 million declined by 23% y-o-y and 12% quarter-on-quarter (q-o-q) respectively mainly due to lower selling price of CPO, partially offset by higher CPO sales. The selling price of PK was higher y-o-y but lower q-o-q.

Cutting our FFB production growth estimate for FY14 from 11% to 8% and raising cost of sales by RM10 million, we cut our FY14 to FY16 core net profit forecast by 9.3%, 3.6% and 3.4%.

With the lower forecast, we have also trimmed FY14 net dividend per share (DPS) forecast from 15 sen to 12 sen, implying a payout of 78% (FY13: 82%). Net DPS forecasts for FY15 to FY16 are maintained at 15 sen.

Our CPO average selling price assumptions are maintained at RM2,400 per tonne in 2014, RM2,600 per tonne in 2015 and RM2,700 per tonne from 2016 to 2017.

Based on the revised 2015 earnings per share forecast of 20.4 sen and an unchanged 2015 price-earnings ratio target of 12 times, TP for Hap Seng Plantations is cut from RM2.54 to RM2.45.

Hap Seng Plantations does not offer superior FFB production growth as management still has no plans for significant additions to planted hectarage.

Dividend yield, however, remains good. Key risks include stronger global economic recovery, lower-than-expected soybean and palm oil production, occurrence of extreme weather conditions and changes in policies (including biofuel mandates). — Affin Hwang Investment Bank Bhd, Nov 13

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This article first appeared in The Edge Financial Daily, on November 14, 2014