16 Jun 2008: Small-Cap Corner: Hap Seng gets boost from fertiliser division

16 Jun 2008: Small-Cap Corner: Hap Seng gets boost from fertiliser division
By Choong Khuat Hock

Hap Seng Consolidated (HSC) is the largest fertiliser distributor in Malaysia and the second largest in Indonesia. It also has a 51.6% stake in listed Hap Seng Plantations, which owns 36.524ha of plantation land in Sabah. The company is also the largest property developer there and has accumulated choice landbank in the Klang Valley, including sites opposite Shangri-La Hotel, and facing the Royal Selangor Golf Club. Its credit business, which focuses on financing small and medium enterprises and industrial equipment, is the third largest in Malaysia.
HSC reported excellent results for the two months to March 2008, with a 110% rise in net profit to RM68.8 million compared to a net profit RM32.7 million for the three months to April 2007. HSC is changing its year-end to December from January and will be reporting results for the 11 months to December 2008. The fertiliser division posted the strongest growth, with operating profits rising to RM71.4 million in the two months to March 2008 from only RM3 million in the three months to April 2007.
The contribution from its plantation division is expected to improve as production is expected to rise from the seasonally low production period in 1Q. Its 1Q production was also adversely affected by wet weather, which hindered the transport of fresh fruit brunches. Its credit business and property division continues to perform well.
The highlight of HSC is its exposure to the booming fertiliser market. Fertiliser prices have skyrocketed due to supply constraints and demand from the agriculture market, which can now afford to pay higher prices due to a surge in the prices of agricultural produce. Should fertiliser prices stabilise, its profit growth from the fertiliser division is expected to moderate but margins are still expected to be higher than margins before the hike in fertiliser prices.
HSC, on a consensus FY2008 PER of 8 times, is cheap compared to international fertiliser and plantation companies. It is likely to exceed consensus forecasts as its RM68.8 million net profit in the first two months of the year is already a third of consensus net profit forecast of RM208 million. Its net cash position at company level of over RM100 million means that it will be able to maintain its high dividend yield. It is trading 24.6% below its book value per share of RM3.70. The value of its 51.6% stake in Hap Seng Plantations is already worth RM2.18 each. This excludes the valuation of its fertiliser and other divisions, which will contribute more than the plantation division this financial year.

Choong Khuat Hock is head of research and a partner at Kumpulan Sentiasa Cemerlang Sdn Bhd


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Hap Seng Fertilizers Sdn Bhd (formerly Hap Seng Sasco Fertilizers Sdn Bhd) is a market leader in the trading and distribution of fertilizers and agrochemicals to the plantation industry in Malaysia, handling more than 700,000 metric tons of fertilizers and 2 million litres of agrochemicals per annum.

Incorporated in 1969 under the name of Sasco Sdn Bhd, the Division's business was originally in the retail business of agricultural supplies of fertilizers, agrochemicals and agricultural hardware. The name "Sasco" was originally derived from "Sabah Agriculture Supplies Company". Hap Seng Fertilizers has long been an established player in the East Malaysian market and in recent years, its active foray into the Peninsular Malaysian fertilizer market has met with rapid annual growth since 2002.

The Division has a team of highly competent and energetic marketers and it has invested extensively to build an expansive distribution network, including a dealers network. Enhanced by quality products and superb reliable service, Hap Seng Fertilizers is now a prominent player in the Peninsular Malaysian fertilizer market and has expanded regionally into Indonesia. Established in 2004, its subsidiary PT Sasco Indonesia is responsible for the marketing and distribution of fertilizers and agrochemicals in Indonesia.

Hap Seng Fertilizers has a wide network of offices and warehouses. The Division's headquarters is located in Petaling Jaya, Selangor and a regional office is in Kota Kinabalu, Sabah. In East Malaysia, branches are located in Sandakan, Tawau, Lahad Datu, Kuching and Bintulu. Apart from warehousing facilities, each branch operates blending and mixing plants, meeting specific customer requirements. Warehouses are located in Port Klang, Prai, Kuantan and Pasir Gudang to support the Division's operations in Peninsular Malaysia.

Hap Seng Fertilizers operates its own NPK granulation plant in Lahad Datu, Sabah with a production capacity of 50,000 metric tons per year. Committed to product excellence, "NAGA" is a NPK brand well known in the Malaysian market.

Hap Seng Chemicals Sdn Bhd (formerly Hap Seng Sasco Chemicals Sdn Bhd), a 70% owned subsidiary, operates a fully integrated glyphosate plant that is the latest in Malaysia. Investment in the latest equipment and stringent quality control ensures products of the highest quality. This glyphosate plant has the capacity to produce more than 2 million litres per year. The glyphosate is marketed under its own brand name, "DEWANA GLYPHOSATE".