Hap Seng Plantations Holdings Bhd 
(July 2, RM2.50)
Upgrade to hold with a higher target price (TP) of RM2.50: Hap Seng Plantations Holdings Bhd  continues to be cautious about major land bank acquisitions in Indonesia and, elsewhere, we understand that a refinery project is being planned. While refining margins remain poor, a refinery should enable Hap Seng Plantations capture the Sabah discount, which could vary from RM40 per tonne to RM100 per tonne currently. 

Based on the group’s crude palm oil (CPO) output of around 173,000 per tonne, we estimate that a Sabah discount of RM100 per tonne  would imply annual savings of approximately RM17 million. Hap Seng Plantations is also investing around RM40 million in two phases in a biogas project, which should help to reduce its power costs and allow it to participate in the feed-in-tariff system. 

The group continues to excel in plantation management. In 2014, the group joined IOI Corp Bhd (5.1 tonnes) and IJM Plantations Bhd (5.2 tonnes) in the “5-tonne per mature hectare” oil-yield league. The group is maintaining its planting discipline, targeting to replant around 1,000ha with better 

planting materials this year. 

Hap Seng Plantations’ first half of financial year ending December (1HFY15) net profit is likely to be lower year-on-year (y-o-y) due to a lower CPO average selling price (ASP) and own fresh fruit bunch (FFB) production (-4.1% y-o-y in the first five months of FY15). 

The Malaysian Palm Oil Board’s CPO prices for Peninsular Malaysia fell 14.8% y-o-y in 1H15,  14.5% y-o-y in the second quarter (2Q15) and 3.2% quarter-on-quarter (q-o-q) in 2Q15. The cost of production in 2015 is expected to be slightly higher at RM1,100 per tonne (2014: RM1,064) due to higher upkeep and fertiliser costs and lower yields. Barring a strong El Nino, we assume own FFB production of around 700,000 tonnes (-3.8% y-o-y). We maintain our core net profit forecasts for 2015 (-10.6% y-o-y), 2016 and 2017. 

Pegging the stock now to its November 2007 to June 2015 average price-earnings ratio of 13 times (versus 12 times previously), we raise our 12-month TP for Hap Seng Plantations to RM2.50. 

At the current price, we upgrade the stock to “hold” from “sell”. Hap Seng Plantations is a well-managed and efficient planter offering above-average dividend yields. — Affin Hwang Capital, July 2

This article first appeared in The Edge Financial Daily, on July 3, 2015.