Hsplant, Withering prospects

UNDERPERFORM Maintained
RM2.41
Target: RM2.36
Mkt.Cap: RM1,928m/US$569m
27 August 2008

Below expectations. Hap Seng Plantations’ (HSP) 2Q results cover the three months ending Jun 08 as the group is changing its financial year-end from Jan to Dec to align with its holding company. The results were below our forecast as the group’s 5M08 net profit of RM54.5m accounted for only 23% of our full-year forecast and 21% of consensus. We suspect the weaker results were due to lower FFB production and higher operating costs. As expected, the group declared an interim dividend of 5 sen.

Volume below forecast. HSP achieved RM123.4m revenue in 5M08 from the sale of 40,762 tonnes of CPO and 5,857 tonnes of palm kernel. The sales volume was lower than our forecast, which could have been due to lower FFB output as the group has successfully cleared the backlog of inventories brought forward from 1Q08. Average selling price achieved was RM2,573 per tonne for CPO and RM1,931 per tonne for palm kernel. The 5M08 average selling price is below market price as the group has sold forward its production. It is also slightly lower than our full-year forecast of RM2,650 per tonne. Apart from lower selling price and FFB production, the weaker results could have been due to higher operating costs from the higher sales tax on CPO in Sabah as well as rising fertiliser costs.

Cutting earnings forecasts by 6-11%. We have preliminarily pruned our FY09-11 earnings forecasts by 6-11% for lower FFB output and higher operating costs. There is earnings downside risk as we are in the midst of reviewing our current CPO price forecast, with a downside bias. Every RM100 per tonne change in CPO price would affect our earnings forecasts by 6%.

Retain UNDERPERFORM with lower target of RM2.36. We retain our UNDERPERFORM call. Our target price is scaled back from RM2.86 to RM2.36 for our earnings downgrade and a lower target forward P/E of 8x (9x previously) in view of the poor results and weaker earnings prospects. Key de-rating catalysts include softening CPO prices, lower crude oil price and rising operating costs.