Hap Seng Plantations - BUY - 22 May 2008

Hap Seng Plantations - Slow start to the year but remain steadfast (Results Note)



Price: RM3.04

Target Price: RM4.38

Recommendation: BUY



· Financial year end change. Hap Seng Plantations Holdings ("HSPH") recently changed its financial year end from 31 January to 31 December and the results released yesterday were for the 2 month period ended 31 March 2008.

· Proforma 1QFY08 FYE 31 Dec was probably below expectations. We gather that the proforma 1QFY08 FYE 31 Dec net profit would have been in the region of RM20.0m or 9% our earnings estimate of RM233.5m and consensus estimate of RM221.1m.

· 1Q net profit of pure plantation companies such as HSPH typically comprises between 10% and 20% of full year net profit estimates due to seasonally lower CPO/FFB production. Management explained that adversely wet weather conditions caused delays in CPO sales.

· This was evidenced in the increase in inventories from RM21.3m as at 31-Jan-08 to RM27.1m as at 31-Mar-08 or approximately 8,000MT which is equivalent to approximately 5% of annual CPO production. Recall that 1QCY08 witnessed heavy rainfall across Malaysia due to La Nina and HSPH primarily operates on a contiguous block of 36,354ha in Sabah.

· No revision in earnings estimates. We opine that our full year FY08E net profit estimate of RM233.5m is achievable if not exceeded once CPO sales resume. On another front, HSPH realised average CPO selling price of RM2,431/MT which is in-line with our average CPO selling price forecast of RM2,500/MT for HSPH.

· Maintain BUY and RM4.38 target price on 15x CY08E PER. For its top notch yields (3rd highest CPO yield among its listed peers at 5.5MT/ha), it is grossly undervalued at single digit forward PERs. Its valuations are the most attractive in our universe of plantation companies under coverage. Investors should anticipate attractive gross dividend yields of between 5% and 7% with its 60% DPR dividend policy.





KENANGA INVESTMENT BANK BERHAD (15678-H)