Hap Seng Plantations (HAPL MK): Potential Record-high CPO

Robust Earnings Expected With Potential Record-High CPO ASP Since Listing for Hap Seng Plantations (HAPL MK). Due to a record high CPO ASP, improved manufacturing, and larger sales volume, we expect HAPL to post strong profit in 2Q-3Q21. The CPO ASP for HAPL on April 21 was RM4,200/tonne, and we expect the ASP for 2Q21 will be the highest since listing.

In addition, HAPL will receive an RM5.6 million tax credit from its two biogas facilities in 2H21, lowering its effective tax burden.

What’s New?

-Strong earnings in the second and third quarters of this year, owing to high selling prices. We expect Hap Seng Plantations (HAPL) to have its best quarter in 2Q-3Q21, thanks to increased crude palm oil (CPO) prices and increasing sales volume. Due to the timing of deliveries, there was an exceptional inventory build-up of 6,000 tonnes in Mar 21, prompting management to forecast greater sales volumes in 2Q21. Crop production was also predicted to increase in the second half of the year, thanks to improved yields in Sabah. It further stated that every RM100 improvement in the CPO ASP will result in an additional RM13m-14m to the company’s bottom line.

-Since listing, the ASP has been at an all-time high. On April 21, HAPL’s CPO ASP was around RM4,200/tonne. With strong CPO spot prices in Malaysia and a higher premium than rivals, we predict HAPL’s CPO ASP for 2Q21 will set a new high since its IPO. The Sustainable Palm Oil (RSPO) and International Sustainability and Carbon Certification (ISCC) for majority of HAPL’s operations account for the higher premium. We also hear that due to the CPO supply shortage in Malaysia, the typical Sabah discount on CPO ASP for Sabah players compared to Peninsular Malaysian players is now close to zero (normal Sabah discount: RM60-80/tonne).

-Biogas plants provide a tax incentive. HAPL applied to the Sustainable Energy Development Authority for a tax credit for two of its biogas plants, with a tax benefit of RM5.6 million expected. This is expected in the second half of 2021, and it will lower the effective tax expense. Both biogas facilities are operational, and the business wants to build a third in Tomanggong, Sabah. This plant has yet to be put out to tender.

• Increase in FFB production. Due to production rebound and stronger yields as a result of increased rainfall at the end of 3Q20 and 4Q20, management forecasted fresh fruit bunch (FFB) production of 691,000 tonnes (+10 percent yoy) for 2021. FFB output is expected to recover in 2Q21, according to management, as weather conditions are expected to normalize following significant rains and flooding in several of the estates in 1Q21. However, due to a labor scarcity during the peak season, we calculate in a 5% decrease in FFB production growth.
• A greater emphasis on harvesting. Management stated that it did not have a labor shortage because it had adequate harvesters. It went on to say that work continued even during the Hari Raya festival. HAPL monitors workers’ wages quarterly to ensure that they are paid at a competitive market rate, which helps to alleviate the labor shortage.
• CPO ASP is the highest among peers. The CPO ASP of HAPL is the highest among plantation firms, according to the CPO ASP table (right). Because it is based on the selling price of its blended palm oil products, Sarawak Oil Palms has a higher CPO ASP.

We think that they will keep their net profit expectations of RM132 million, RM76 million, and RM70 million for 2021-23.