• MYR2.00 FV based on 14x FY24F earnings. With better-than-average dividend yield of c.6% for FY24F-25F, we believe Hap Seng Plantations is an attractive dividend play within the plantation sector, while valuation is cheaper than peers. With more than 50% of its plantations yet to reach prime age, production growth should continue on its recovery path going forward, helping to offset the impact of flattish ASPs. Our target P/E is 2.5x below its historical mean of 16.5x.

• Keeping it consistent. HAPL has succeeded in maintaining its dividend payout policy of at least 60% PAT, which is above the industry average. This translates to dividend yield of 4-10%, with the exception of FY18-19 (1.4%). Currently sitting on a net cash of MYR415.4m (or MYR0.52/share) as at 9M23 with no major capex requirements, the company should have no restrictions maximising shareholder returns. This is an attractive proposition, as its FY24F-25F dividend yield of 6% each will act as a tailwind to its share price despite the flattish CPO price environment.

• Strong FFB growth recovery. FFB output growth has been affected by weather-related issues over the last few years, with FY20-22 seeing FFB output declines of 5.7%, 6.9% and 1.6%. However, in 2023, the weather improved and output growth recovered substantially, with FFB growth of 11.5% in YTD-November. This is admirable compared to national figures in 11M23, which saw an increase of only c.1% in CPO production while FFB processed remained the same. We expect 2023 to see output going back to pre-COVID-19 levels of 650k per year (+11.7% YoY). This growth is expected to continue into FY24 and FY25, notwithstanding a strong El Nino, as the trees recover from the last few years of tree-stress. Management is guiding for FFB growth of 7-8% in FY24, in line with our forecasts.

• CPO performance proxy – but outperforming in recent months. As a pure upstream player, HAPL is sensitive to CPO prices – where earnings change by 7.3% for every MYR100/tonne. While its share price generally mirrors CPO prices, it is more resilient when CPO prices retreat, as seen in the share price performance since May 2022. As we expect CPO prices to re-rate somewhat in 1H24, due to low seasonal output and the impact of El Nino, we expect the company’s share price to move in tandem.

• Attractive valuation. We project a 2020-2025F earnings CAGR of 12%. This is achieved despite our flattish CPO price assumption of MYR3,900/tonne for FY23F-25F, as it is offset by strong FFB growth of 7- 12% pa and reducing unit costs. HAPL currently trades at 12x FY24F P/E, below its pure Malaysian peers, but above its Sarawak-listed peers.

• Key risks include CPO price downtrend, weather, and worsening labour situation.

Source: RHB Securities Research - 29 Dec 2023