CPO price rally likely priced in
? HSP guided for a 14% yoy rise in costs of production (RM256 per tonne
increase) owing to the minimum wage hike and higher manuring costs.
? The group is likely to book stronger qoq earnings for 2Q22F on the back of
higher CPO prices and seasonally stronger FFB output.
? We retain our Hold call as rising CPO earnings likely priced into valuations.
While HSP’s yield recovery is a plus, this is likely to be offset by…
During its 1Q22 results briefing, Hap Seng Plantations (HSP) shared that it is maintaining
its FFB output growth guidance of 17% yoy to 691k tonnes in FY22F, mainly owing to a
recovery in yields. This represents a sharp jump from its 4M22 achieved FFB output
growth of only 1%. The group’s FFB output target is 7% higher than our forecasted FFB
output of 640k tonnes (+12% yoy growth) for FY22F, as we estimate a more moderate
FFB yield recovery. We estimate 14% upside to our FY22F core EPS forecast should the
group achieve its FFB output target for FY22F. HSP shared that its labour shortage was
less than 1% in 1Q22, which is much lower than the industry-wide labour shortage of
c.20-30%. Hence, contrary to other planters, we do not foresee labour issues as a
potential hindrance to FFB output for HSP in FY22F.
…rising manuring and labour costs going into 2H22F
The group guided that its overall CPO cost of production (after PK credit, excluding taxes
but including FFB purchases) is likely to trend 14% higher yoy to c.RM2,100/tonne in
FY22F vs. FY21 cost of production of RM1,844/tonne. This is mainly driven by higher
manuring and labour costs, which would offset their 17% higher FFB output assumptions.
HSP has completed the tender for its fertiliser requirement for the full year, with its
manuring costs rising 136% yoy for FY22F, with the bulk of the increase coming in
2H22F (2.1x hoh increase vs. 1H22F) and expects this to trend potentially higher hoh in
2H22F. HSP is also likely to see a RM15m increase in labour costs in FY22F from the
higher minimum wage of RM1,500 per month (vs. RM1,100 in Sabah previously), which
is likely to have taken effect in May 2022.
Anticipate stronger 2Q22F owing to higher prices
In our view, HSP is well positioned to benefit from the rise in CPO prices as the group
sells most of its CPO on a spot basis. The Malaysian Palm Oil Board’s (MPOB) average
CPO prices achieved were RM6,678/tonne in Apr 22 and RM6,921/tonne MTD in May 22
vs. HSP’s 1Q22 achieved CPO price of RM6,019/tonne, indicating stronger qoq CPO
prices for HSP. In addition, we estimate HSP will benefit from seasonally higher FFB
output, though this could be partially offset by higher labour costs. In light of its higher
manuring and labour costs, we cut our FY22F core EPS forecast by 12.7% and fine-tune
our TP to RM2.80, still based on 15.9x CY23F P/E, in line with its 5-year mean. This
essentially values HSP’s estates at RM51k/ha, which we think is fair given the high CPO
price environment. We retain our Hold call as we think the sharp CPO price rally has
been baked into HSP’s valuations at this juncture.