Hap Seng Plantations eyes local expansion of plantation estate

KUCHING: Hap Seng Plantations HoldingsBhd(HapSengPlantations) is looking at expanding its oil palm plantation estates locally.

Following a company visit, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) in a report yesterday said the company’s management is keen on expanding its acreage, with a strong preference in Malaysia, specifically Sabah area.

The research firm noted that the company is less keen on foreign expansion, preferring to leverage on local expertise and efficiencies.

Thus, Kenanga Research was positive on Hap Seng Plantations’s expansion plans, particularly if the target area is fairly young in average palm oil tree age potentially less than seven years.

Nonetheless, the research firm noted the scarcity and pricing premium of plantation land in Malaysia could limit the company’s options.

In spite of that, Kenanga Research opined that in the event the company manages to get a suitable large parcel of plantation land, it is confident in terms of the company’s funding for the land acquisition given its net cash position of RM178 million as of financial year 2015 (FY15).

The research firm estimated that Hap Seng Plantations could raise funds up to RM1.2 billion for land acquisition, which should support a purchase of approximately 14,800 hectare (ha) of brownfield land with an assumed price of RM80,000 per ha assuming a comfortable net gearing level of 0.5 times.

It projected that the expansion could represents a potential area growth capacity of approximately 37 per cent on current land bank of 39,800 ha managed by the company.

In the meantime, Kenanga Research said Hap Seng Plantations is a medium- sized upstream plantation player operating plantations in Sabah.

It observed that the plantation company owns 39,800 ha of land which 90 per cent or 35,500 ha of land is planted with palm oil trees.

Kenanga Research pointed out that the company is competitive in Sabah although its land bank is relatively small against the plantation sector’s average gross land bank of 232,000 ha.

Apart from that, the research firm said the company’s management also did not rule out downstream expansion over the long-term given the right timing and cost.

It noted the company’s most recent expansion was a fairly small bolton acquisition of smallholder area of less than 500 ha which already supplies the company with fresh fruit bunches (FFB).

Additionally, Kenanga Research observed that the company is in the midst of adding biogas plants to two mills, which will save on electricity cost over the long run.

It gathered that the plants will incur a capital expenditure of RM50 million with potential in reinvestment tax savings in FY17.

Having said that, Kenanga Research noted the company expects to see RM3 million in cost savings from the project in which the research firm estimated could increase operating profit margins by another 0.6 per cent from the current 27.6 per cent.

Besides that, Kenanga Research believed Hap Seng Plantations is also poised to reap the benefit of high crude palm oil (CPO) price.

It observed that CPO prices have performed strongly in 2016, with the plantation company’s average selling price in the second quarter to third quarter of 2016 jumped 22-27 per cent year-on-year (y-o-y) to RM2,644-RM2,661 per metric tonne (MT).

At the same time, the research firm also observed recent CPO price trends showed continued strength on supply limitations with prices in 4Q16 extending its gains to average RM2,914 per MT or an increase of 32 per cent y-o-y.

Hence, Kenanga Research bel ieved the st rong CPO price support should help offset seasonally softer 4Q16 production, hence strong 3Q16 earnings performance should be sustainable in the near term.

The research firm was positive on Hap Seng Plantations’s earnings growth outlook as it revised up its FY16-FY17 CPO price forecast to RM2,600 - RM2,550 per MT from RM2,500RM2,400 per MT.

Despite near- term production lags, Kenanga Research expects the plantation company to see continued earnings growth of 23.6 per cent on better prices and lower CPO costs due to fertilizer and energy savings.

The research firm observed that Hap Seng Plantation’s oil palm production has consistently outperformed its forecast, with above- average yields in the last five years ranging between 16 and 25 per cent higher than that of the Malaysian average of 18.019.7 MT per ha.

Simi larly, the research firm noted the company’s oil extraction rate ( OER) was consistently above average of between 21.0- 22.0 per cent as compared to other Malaysian planter’s average of 20.2 to 20.6 per cent.