HSPLANT's post-results briefing suggest that a robust ending for FY24 is in store, thanks to a confluence of strong commodity prices coupled with a good harvest season. Firm CPO prices should remain going into 1HFY25, offsetting higher minimum wages to provide a positive earnings outlook for the next quarter or two. Maintain FY24- 25F earnings, DPS of 9 sen, TP of RM2.70 as well as OUTPERFORM call.

Key takeaways from HSPLANT 3QFY24 results briefing on Friday are as follows:

1. CPO prices should stay good till early FY25. The group expect firm full- year FY24 CPO prices, hovering at around RM4,300 per MT which is a tad (2%) above our recently upgraded CPO price of RM4,200 per MT for the group. However, HSPLANT was less cordial on its expectation for CPO prices for FY25. Nevertheless, the fact that group's palm oil storage facilities are reportedly full may indicate commitment to forward sales already made. Maintain CPO price of RM4,200 per MT for FY24-25.
2. FFB to peak in 4Q. HSPLANT is expecting its FFB harvest to peak in 4Q which is quite common for the group. Overall, full-year FY24 FFB output of 0.67m MT is still expected by HSPLANT. However, we prefer to maintain our slightly (3%) lower estimate of 0.65m MT for the group in FY24. HSPLANT expects the current biological up-cycle in FFB yields to continue into FY25. We are expecting a YoY uptick of 6% for its FY25 FFB harvest.
3. Production cost is likely to stay contained. Thanks to better harvest, firmer PK prices and soft fertiliser prices, HSPLANT's 9MFY24 CPO cost declined by 11% YoY to RM2,398 per MT. The guidance is for cost to average down further for the full-year to FY24, at around RM2,300 per MT. FY25 costs may either (a) inch up by 2-3% as higher minimum wages (+13%) takes effect in Feb 2025 or (b) stay flattish as fertiliser prices are expected to remain soft, firmer MYR and better FFB harvest.
4. 60%-70% dividend pay-out to stay. Over the past 10 years, HSPLANT has paid between 46% to 81% (65% on average) of its basic EPS as dividends. Having ended Sept 2024 with RM502m in net cash, the group's generous 60%-70% of basic EPS dividend payout is likely to continue. As is the practice of HSPLANT, the bulk of its dividends will only be declared in 4Q when the full-year's results have already been finalised.

Forecasts. No change to FY24-25 forecasts as the estimated variance is under 5%.

Valuations. TP is kept unchanged at RM2.70 based on 16x forward PER, being the 6-month average (and 3-year average) for smaller plantation companies. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). We had also earlier raised our annual NDPS from 7 sen to 8 sen for FY24-25.

Investment case. HSPLANT main investment merit is defensiveness, underpinned by: (i) a highly cash-generative upstream-centric oil palm operations, (ii) solid net cash holding, (iii) decent dividend record and (iv) good operational record. With improving earnings, strong cash position and higher dividend pending, we are keeping our OUTPERFORM call.

Risks to our call include: (i) Western hostility towards palm oil on sustainability and bio-diversity issues; (ii) impact of weather and labour shortages on production, (iii) weak CPO and PK prices, and (iv) cost inflation particularly fertilisers.

Source: Kenanga Research - 25 Nov 2024