This article first appeared in The Edge Financial Daily, on April 8, 2016.

Hap Seng Plantations Holdings Bhd 
(April 7, RM2.43)
Maintain hold with a target price (TP) of RM2.45: Hap Seng Plantations Holdings Bhd’s management guided that it acquired around 1,500ha of mature oil palm planted areas early this year, boosting its planted areas by 4% to 37,000ha. 

Production was impacted in the first two months of 2016, with fresh fruit bunch (FFB) output declining by 44% quarter-on-quarter and 25% year-on-year. Production in March 2016 is also seen to be weak. But with the projected recovery in yields in the second half of 2016, coupled with the new areas acquired, management aims to maintain 2016 FFB production at around 710,000 tonnes.

With no major overseas expansion plans, the group is expected to keep looking for smaller areas in close proximity to its existing estates, limiting growth in planted areas. 

Until the acquisition early this year, the group’s land bank had been unchanged at 39,803ha since 2009. The average age of 15.5 years looks high, but management pointed to the group’s high oil yield of five tonnes per ha in 2014 and 4.8 tonnes per ha in 2015. Replanting with higher-yielding materials will be maintained at around 4% per annum.

Cost of production of crude palm oil increased from RM1,064 per tonne in 2014 to RM1,137 per tonne in 2015, due to higher costs of labour and fertilisers on a weaker ringgit. While fertiliser prices have stabilised, we expect the increase in the minimum wage from RM800 to RM920 in East Malaysia effective July 1 and a RM50 hike in the foreign worker levy to raise cost of production by around RM20 per tonne in 2016.

New areas acquired are expected to cushion the negative impact of extreme dryness to maintain FFB production. Unless the ongoing El Nino impacts production more significantly, our forecasts and TP are maintained. Upsides to its share price remain limited until there are plans to significantly grow planted areas and/or realise the value of its plantation assets. But its above-average dividend yields are expected to improve. We maintain our “hold” call. — Affin Hwang Capital, April 7