KUALA LUMPUR: CIMB Equities Research has cut its rating for Hap Seng Plantations to Hold with a lower target price of RM2.57 from RM2.89 previously.
It said on Tuesday it cut its FY17F-19F net profit by between 2% and 15% to reflect lower palm kernel (PK) prices, weaker fresh fruit bunches (FFB) yields and higher production cost.
This, coupled with the rollover of its valuation to CY19F, led it to reduce its target price to RM2.57, still based on 16 times P/E (historical average), and downgrade its call to Hold.
“Hap Seng Plantations' share price is supported by the low implied enterprise value per hectare (EV/ha) for its estates of only RM55,000, below the market price of RM70,000 to RM80,000 for Sabah estates,” it said.
CIMB Research said the company’s 3Q17 core net profit fell 39% on-year and 10% on-quarter to RM26mil due to lower FFB output and selling prices for PK.
“We consider 9M17 core net profit to be below our and market expectations, as it accounted for only 72% our and 64% of Bloomberg consensus full-year forecasts.
“The weaker-than-expected results against our forecasts were due to lower-than-expected FFB output,” it said.
The average CPO selling price it achieved in 3Q17 was RM2,765 per tonne (+4.5% on-year), ahead of Sabah’s average CPO price of RM2,673 per tonne.
However, average PK prices achieved fell 13% on-year to RM2,327 per tonne in 3Q17, due to rising supplies.
The selling prices achieved for CPO were above expectations but this was offset by weaker PK prices during the quarter.
“Lingering El Nino effect cut FFB output in 3Q17 FFB output declined 15%/4% on-year in 3Q17/9M17 on the back of lower-than-expected rainfall at its estates in 2015 due to El Nino.
“This was below our expectation of 5% growth in FFB output for FY17F and weaker than Sabah state's (where all of its estates are located) achievement of a 4% rise in 9M17 FFB output.
“This weaker performance could be partly due to replanting efforts by the group as well as the fact that its estates were more badly impacted by the El Nino induced drought in 2015,” it said.
CIMB Research pointed out Hap Seng Plantations' CPO sales volume of 33,376 tonnes in 3Q17 was 5,000 tonnes lower compared to its CPO production of 38,355 tonnes.
“We suspect this could be due to timing of delivery of its production to the refiners, which led to higher inventory at end-September.
“Overall, the lower output as well as sales volumes more than offset the higher ASP for CPO, causing 3Q17 net profit to fall 10% on-quarter and 39% on-year.
“However, 9M17 net profit grew 12% on-year as stronger average selling prices for CPO and PK more than offset the lower FFB output.
“We expect Hap Seng Plantations to deliver stronger earnings in 4Q17F due to higher CPO sales and FFB production. CPO sales volumes could pick up due to unsold CPO inventory as at end September.
“On top of this, the group could potentially benefit from lower tax as it utilises the tax benefit from its investment in biogas plant,” said CIMB Research.
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