Hap Seng Plantations’ 1Q18 misses the mark due to lower CPO prices

KUCHING: Hap Seng Plantations Holdings Bhd’s ( HSP) f irst quarter of 2018 (1Q18) core net profit (CNP) of RM15.4 million has missed the mark as it only met 12 per cent of the market’s full year CNP expectations of RM132.2 million.

In a results note, the research arm of Kenanga Investment Bank Bhd ( Kenanga Research) explained that the missed results were largely due to lower crude palm oil (CPO) and palm kernel ( PK) prices that saw declines of 21 and 31 per cent respectively in 1Q18.

“This was combined with higher depreciation charge after a change in accounting policy, and higher effective tax rate for the quarter,” said the research arm.

The effective tax rate of 31 per cent in 1Q18 is 26 per cent higher year over year (y- o-y) and 23 per cent higher quarter over quarter (q- o- q).

The lower palm oil prices, depreciation charge and tax rate caused HSP’s CNP to decline by 35 per cent despite the group recording a better fresh fruit bunch ( FFB) production of 22 per cent y- o-y increase during the quarter under review.

Going forward, Kenanga Research pegged a mixed outlook for HSP as demand of palm oil is expected to decline due to India’s tariff on edible oils but potentially pick up from China’s side should their US soybean tariffs go into effect.

“We bel ieve that wit h produc t ion expe c t ed to improve towards the second half of 2018, CPO prices are expected to continue declining. Operationally, we expect HSP’s unit costs to ease with rising production in 2H.

“However, recal l that we expected its plan to acquire a stake in Kretam Holdings Bhd to be earnings dilutive, and the deal is expected to be concluded in FY18, pending shareholders’ approval. As such, investors could expect earnings risks going into end-2018 and likely in FY19 as well,” guided the research arm.

To ref lect the change in account policy, and tweak cost expectations to incorporate 1Q18’s margin compression, Kenanga Research is cutting their FY18-19 CNP by 21 to 14 per cent to RM 93 to RM103 million.

Kenanga Research pegged a mixed outlook for HSP as demand of palm oil is expected to decline due to India’s tariff on edible oils but potentially pick up from China’s side should their US soybean tariffs go into effect.