One Of The Best Performers Among Plantation Stocks
HAPL’s share price has increased 78% ytd, one of the best performers in the plantation
sector. It is still our top pick, supported by its high leverage on the high CPO prices
currently. We estimate 1Q22 net profit at RM70m (1Q21: RM23m, 4Q21: RM75m). HAPL
continues to benefit from high spot prices and better premium for RSPO-certified CPO.
Maintain BUY with a higher target price of RM4.00 factoring in higher CPO selling
prices.
WHAT’S NEW
• 1Q22 preview. Hap Seng Plantations (HAPL) will be releasing its 1Q22 results on 25 May 2022. We reckon that the net profit for 1Q22 may be around RM70m (1Q21: RM23m, 4Q21:
RM75m). The lower qoq profit is mainly due to a significant drop of 17.6% qoq for its FFB
production. Having said that, this was well cushioned by the high CPO prices with the local
CPO price in Sabah at about RM5,928/tonne (+16% qoq, + 53% yoy) in 1Q22.
• Key takeaways from recent meeting with management:
a) Cost of production continues to rise. The management is expecting the cost of
production to continue rising mainly due to higher labour cost, fertiliser cost and fuel cost.
HAPL had just also completed the 2H22 fertiliser tender, where the management guided
that the fertiliser cost had increased by at least 50% yoy (can even hit up to 100% yoy).
The labour cost (labour cost contributed about 30% of 2021 cost of production) is also
expected to be higher in 2022 to retain the labour in the estates and the impact from the
increment of minimum wage of RM1,500. The impact from the higher fuel and electricity
cost is expected to be marginal as HAPL has its own renewable energy plant which
contributed about 50% of its energy requirement.
b) Narrowing discount between Malaysia’s and Sabah’s CPO prices. In the past,
Sabah’s CPO price was always at about 10% discount to Malaysia’s average CPO price.
However, the discount had been narrowing recently with the strong demand for Malaysian
palm oil, thanks to Indonesia’s frequent changes in policies. Based on MPOB data,
Sabah’s average CPO price in March is at RM6,726/tonne vs Malaysia’s average CPO
price in March at RM6,867/tonne.
STOCK IMPACT
• Selling policy and pricing. As we have always highlighted, HAPL sells 100% of its products at spot markets which enabled it to capture the current high prices since 2021. On top of that, the management had also highlighted that the premium for Roundtable Sustainable Palm Oil (RSPO) had increased over the last two years with higher demand for sustainable raw materials and hence HAPL is a direct beneficiary of this. HAPL’s CPO net ASP is always slightly higher than its Sabah peers’ by about 10-15%, thanks to the RSPO premium.
• Negligible impact from prosperity tax. Management guided that the impact from the prosperity tax would be about RM2m (<2% of earnings), based on the assumption of an average CPO price of RM3,500/tonne for 2022.
• Higher FFB production growth for 2022. Management has guided production growth of 17% yoy for 2022 on the back of delayed production recovery as well as better harvesting and evacuation processes thanks to the more favourable weather. The FFB production for 1Q22 came in at -17% qoq and +5% yoy. The lower qoq production was mainly due to wet weather. Having said that, there is nothing major which would disrupt its replanting activities for 2022. We remain conservative, only factoring in FFB production growth of 10% yoy for 2022.
EARNINGS REVISION/RISK
• Adjusted earnings forecasts. With HAPL’s CPO net ASP always tagged to Malaysia’s CPO spot prices and its RSPO premium, we have revised our CPO ASPs for HAPL higher to RM5,200/tonne and RM4,000/tonne (from RM4,200/tonne and RM3,000/tonne) for 2022-23. We have also factored in higher cost of production with the rising fertiliser and labour costs.
• We revise net profit forecasts for 2022/23F, increasing 26/50% to RM289m and RM176m respectively. For 2024F, our net profit forecast is at RM102m.
VALUATION/RECOMMENDATION
• Maintain BUY with higher target price of RM4.00 (previous: RM3.15), based on 11x 2022F PE, or -2SD to its five-year mean, on the back of higher CPO net ASP. SHARE PRICE CATALYST
• Higher-than-expected CPO prices. • Higher-than-expected production.