CIMB Research retains add for Hap Seng Plantations

The benchmark palm oil contract for August delivery on the Bursa Malaysia Derivatives Exchange was up 0.3 percent at 2,635 ringgit ($609.95) a tonne at the close. It earlier fell to 2,597 ringgit, its lowest since Tuesday. The contract is however down 0.6 percent for the week, its first weekly decline in three.

KUALA LUMPUR: CIMB Equities Research is maintaining its Add call for Hap Seng Plantations with an unchanged target price of RM2.89.

It said on Thursday its target price was still based on 16 times price-to-earnings (historical average). 

“We keep our Add call, due to its undervalued plantation assets and attractive dividend yields. At the current share price, the implied enterprise value/ hectare (EV/ha) for its estates is only RM56,000, below the market price of RM70,000 to RM80,000 for Sabah estates. 

“Key downside risks are lower-than-expected fresh fruit bunches (FFB) output and average selling price for palm products,” it said.

Hap Seng Plantations' 1Q17 core net profit grew 105% on-year to RM34mil due to higher selling prices for crude palm oil (CPO) and palm kernel (PK) as well as stronger output. 

It considered 1Q17 core net profit to be in line with its and market expectations as it made up 28% of its and 25% of Bloomberg consensus full-year forecasts. 

“We project weaker earnings in future quarters, due mainly to lower CPO prices. As expected, no dividend was declared in 1Q17,” it added.

The average CPO selling price that the company achieved in 1Q17 rose 38% on-year and
12% on-quarter to RM3,268 per tonne, which is ahead of Sabah’s average CPO price of RM3,114 per tonne. 

“We believe that the higher CPO price could be due partly to the premium pricing achieved for its certified sustainable palm oil. Average PK prices achieved rose 62% on-year and 11% on-quarter to RM3,282 per tonne in 1Q17, due mainly to tight palm kernel and coconut oil supplies.

FFB output rose 7.2% on-year in 1Q17, as FFB yields at its estates recover from the El Nino effect. This was lower than Sabah state's (where all of its estates are located) achievement of a 15% jump in output. 

This was because Hap Seng Plantations' estates were less impacted by the El Nino impact in 2016. The higher ASP for palm products, together with the higher output, contributed to the group’s strong net profit growth for 1Q17.

“However, on-quarter,  the group posted a 24% drop in net profit due to higher manuring costs, higher repair and maintenance costs on roads and bridges caused by the exceptional wet weather and the absence of a gain from the reversal of overprovision of labour mobilisation costs of RM5mil in 4Q16

“The group revealed that palm oil prices declined in April and recovered slightly in early
May. 

“However, sentiments in the palm oil market remain subdued due to weak soyoil prices and expectations of higher production. The group expects demand for palm oil to remain strong in the near-term, supported by demand during the fasting month, and expect this to lend support to palm oil prices,” it said.