High CPO prices to sustain Hap Seng Plantations’ earnings growth

palm oil fruitss

PETALING JAYA: Despite rising costs, Hap Seng Plantations Holdings Bhd’s earnings growth will remain well supported by strong crude palm oil (CPO) prices.

The company, whose stock has been one of the best-performing counters on Bursa Malaysia year-to-date, is expected to continue benefiting from high spot prices and better premium for its Roundtable on Sustainable Palm Oil (RSPO)-certified CPO.

Given the optimistic outlook for the company, UOB Kay Hian Research has raised its target price for Hap Seng Plantations to RM4 from RM3.15 previously.

The revised target price was based on 11 times the estimated price-earnings ratio for financial year ending Dec 31, 2022, or minus two standard deviation to its five-year mean, on the back of higher CPO net average selling prices (ASP).

The brokerage maintained its “buy” recommendation on Hap Seng Plantations.

“With Hap Seng Plantations’ CPO net ASP always tagged to Malaysia’s CPO spot prices and its RSPO premium, we have revised our CPO ASPs for Hap Seng Plantations higher to RM5,200 per tonne and RM4,000 per tonne (from RM4,200 per tonne and RM3,000 per tonne) for 2022-23,” UOB Kay Hian Research said in its report.

After factoring in higher cost of production with the rising fertiliser and labour costs, the research house revised its 2022/23 net profit forecasts for Hap Seng Plantations higher by 26% to 50% to RM289mil and RM176mil, respectively. For 2024, its net profit forecast for the company stood at RM102mil.

The management is expecting the cost of production to continue rising mainly due to higher labour cost, fertiliser cost and fuel cost, the brokerage noted following a recent meeting with the company.

“Hap Seng Plantations had just also completed the second half 2022 fertiliser tender, where the management guided that the fertiliser cost had increased by at least 50% year-on-year (y-o-y).

“Labour cost (about 30% of 2021 cost of production) is also expected to be higher in 2022 to retain the workers in the estates and the impact from the increment of minimum wage of RM1,500,” it said.

“The impact from the higher fuel and electricity cost is expected to be marginal as Hap Seng Plantations has its own renewable energy plant which contributed about 50% of its energy requirement,” it added.

Hap Seng Plantations sells 100% of its products at spot markets which enabled it to capture the current high prices since 2021, the research house noted.

On top of that, the management also highlighted that the premium for RSPO had increased over the last two years with higher demand for sustainable raw materials and hence Hap Seng Plantations is a direct beneficiary of this.

Meanwhile, Hap Seng Plantations guided a production growth of 17% y-o-y for fresh fruit bunch (FFB) 2022 on the back of delayed production recovery as well as better harvesting and evacuation processes thanks to the more favourable weather.

However, UOB Kay Hian Research said it remained conservative, only factoring in FFB production growth of 10% y-o-y for Hap Seng Plantations for 2022.

On prosperity tax, Hap Seng Plantations expected a negligible impact from the scheme supported by high CPO prices.

“Management guided that the impact from the prosperity tax would be about RM2mil (less than 2% of earnings) based on the assumption of an average CPO price of RM3,500 per tonne for 2022,” the research house said.

Hap Seng Plantations is expected to release its first-quarter 2022 (1Q22)results on May 25.

UOB Kay Hian Research expected the company’s 1Q22 net profit to come in around RM70mil, compared with RM75mil in 4Q21 on lower FFB production.

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