HSP’s 1Q22 core net profit of RM74.1m (-1.2% QoQ; 2.2x YoY) came in above expectations, accounting for 34.1-40.3% of consensus and our full-year estimates, due mainly to higher-than-expected realised palm product prices. We raise our FY22-24 core net profit forecasts by 34.1%/29.2%/36.0%, mainly to account for (i) higher CPO price assumptions (RM5,500/4,500/4,500 per tonne in FY22-24 following our (i) recent upward revision in CPO price assumptions for the sector), (ii) higher CPO production cost assumptions, and (iii) lower FFB yield assumptions. Post earnings revision and recalibration of earnings model, we upgrade our rating on HSP to BUY (from Hold) with a higher sum-of-parts TP of RM3.32.

Beat expectations. 1Q22 core net profit of RM74.1m (-1.2% QoQ; 2.2x YoY) came in above expectations, accounting for 34.1-40.3% of consensus and our full-year estimates, due mainly to higher-than-expected realised palm product prices.

Exceptional items (EIs) in 1Q22. Core net profit of RM74.1m was arrived after adjusting for (i) RM18.9m disposal gains, (ii) RM8.9m fair value gain on biological assets.

QoQ. Core net profit fell marginally (by 1.2%) to RM74.1m in 1Q22, as higher CPO sales volume (+9%) and realised palm product prices (CPO: +18%; PK: +25%) were more than weighed down by higher CPO production cost (arising from seasonally lower FFB output).

YoY. Core net profit surged 2.2x to RM74.1m in 1Q22, boosted mainly by sharply higher realised palm product prices (CPO: +56.2%; PK: +81.9%), a 4.7% increase in FFB output, and higher CPO sales volume (+27.8%, due mainly to inventory movements).

FFB output. Following a strong rebound in Jan-22, FFB output resumed its downtrend since Mar-22 (by -10% YoY in Mar-22 and -9% in Apr-22), bringing total output to 180.5k tonnes in 4M22 (+1%).

Forecast. We raise our FY22-24 core net profit forecasts by 34.1%/29.2%/36.0%, mainly to account for (i) higher CPO price assumptions (RM5,500/4,500/4,500 per tonne in FY22-24 following our (i) recent upward revision in CPO price assumptions for the sector), (ii) higher CPO production cost assumptions, and (iii) lower FFB yield assumptions.

Upgrade to BUY with higher TP of RM3.32. Post earnings revision and recalibration of earnings model (following the release of FY21 annual report), we raise our sum-of parts TP on HSP to RM3.32 (from RM2.70 earlier), based on 15x revised FY23 EPS of 18.9 sen and latest net cash balance of 49.3 sen. Upgrade to BUY (from Hold), as valuation has turned more attractive following our earnings revision and recent share price retracement.

Source: Hong Leong Investment Bank Research - 26 May 2022