Hap Seng shares trading at cheap valuations

Friday April 18, 2008
Hap Seng shares trading at cheap valuations
By YEOW POOI LING

PETALING JAYA: Shares in Hap Seng Plantations Holdings Bhd (HSPlant) are currently trading at cheap valuations despite crude palm oil (CPO) prices hovering above RM3,000 per tonne.

Based on Bloomberg’s earnings per share (EPS) estimate of 27.7 sen for the period ending Jan 31, 2009, and yesterday’s closing price of RM2.93, the stock is trading at a price-to-earnings (PE) of 10.6 times.

The share price is a 22% discount to its high of RM3.78 in January. The planter is one of the most efficient in terms of operational cost, which is handy in times of escalating prices.

During the listing exercise in November last year, the management indicated that fresh fruit bunch yields were at 25.3 tonnes per hectare per year.

In January, it decided to change its financial year-end to Dec 31 from Jan 31 previously, hence the current reporting period would only comprise 11 months.

For the financial year ended Jan 31, it achieved an average CPO selling price of RM2,289 a tonne and posted a net profit of RM165.6mil (including a negative goodwill of RM77.3mil) on revenue of RM216.6mil. EPS stood at 41.2 sen.

The company declared a total dividend of 10 sen per share, which translates into a yield of 3.4%. Based on its indicative dividend payout of 60% of profits, the yield is likely to improve to over 6% in the current fiscal year.

HSPlant has an aggressive forward selling policy with about half of production in 2008 already sold at about RM2,000 a tonne.

A plantation analyst said: “There should be no downside to earnings even if CPO prices were to fall significantly, as the company has already sold forward half of production.”

The remaining production will be sold at current prices. The analyst estimated HSPlant would achieve an average price of RM2,500 for calendar year 2008.

“Nothing has been sold yet for next year’s production. Hence, the company will stand to benefit in 2009, as long as CPO prices remain above RM2,500 a tonne,” he said, noting that annual production growth of 3% to 4% was likely over the next two years based on existing plantations.

HSPlant has a total land bank of 32,752ha, which are fully planted, with over 95% matured areas. The balance 5% should reach maturity next year.

More than 75% of plants are below 17 years old, indicating potential growth in the future. The planter has signalled plans to increase acreage.

A news report yesterday said the Government was reviewing the cess rate for plantations. This is good news for industry players as margins are likely to improve further.

TA Securities estimated that FY09 earnings estimates of plantation stocks under its coverage could be upgraded by 3% to 7% if the cess rate was completely removed.

Meanwhile, K&N Kenanga, in a recent report, said: “Every RM100 per tonne increase in average CPO selling price accretes 2 sen to HSPlant’s forward EPS or 30 sen to target price.”

Being a pure planter with no downstream operations, and coupled with a strong management team, HSPlant should be among the top beneficiaries of CPO prices.