Hap Seng Plantations Holdings Bhd
(Sept 4, RM1.40)
Maintain neutral with an unchanged fair value (FV) of RM2.08: We retain “neutral” and our FV of RM2.08 of one times pegged at price-to-book value for Hap Seng Plantations Holdings Bhd. We maintain our earnings and dividend forecasts. Risks to our call include crude palm oil (CPO) price surge from improved demand, lower supplies or unfavourable weather. We do not recommend investors actively invest in upstream plantation companies given the seasonal downswing in the industry.

Second quarter of financial year 2019 (2QFY19) earnings before interest, taxes, depreciation and amortisation (Ebitda) contracted 51.2% year-on-year (y-o-y) to RM19.4 million owing to lower CPO and palm kernel oil (PKO) prices of -18% y-o-y and -35% y-o-y respectively. Profit after tax slipped into losses at -RM4.3 million compared to +RM3.9 million in the previous corresponding quarter due to lower CPO and PKO prices. On a quarter-on-quarter basis, Ebitda contracted at a lower magnitude of 22.5% q-o-q, driven by lower prices of CPO and PKO. Overall, six months of FY19 (6MFY19) Ebitda represents 35.6% of our Ebitda forecast. Upstream planters usually see full-year financial results split of 40:60 between first half (1H) and 2H performances. Elsewhere, recovery from El Nino and La Nina led to a 6MFY19 fresh fruit bunch (FFB) production growth of 9.3% y-o-y. We maintain our CPO and PKO price assumptions for the year at RM2,200 a tonne and RM1,500 a tonne respectively.

Hap Seng Plantations’ second biogas plant is expected to commence by next month, offering a tax credit of RM5.4 million to the group. The third and final plant comes with a capital of RM18 million and will be commissioned by end-2020. The first plant is on track to see a payback within four to five years from diesel cost-savings. The group intends to maintain its dividend policy payout of approximately 60%. Moving forward, the group is on track to register 680,000 tonnes of FFB production and we view the world edible oil supply-demand dynamics have passed their worst stage though prices are likely to remain in the doldrums. The plantations company declared an interim single-tier dividend of half a sen against 1.55 sen last year. — Inter-Pacific Research, Sept 3