HAPL: Palm Oil Producer Anticipates Second Half Recovery Amid Cost Controls
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation |
A leading palm oil producer is forecasting a significant earnings recovery in the second half of the current fiscal year, despite a softer performance in the first six months. The expected rebound is largely driven by anticipated stronger seasonal Fresh Fruit Bunch (FFB) production, stable CPO prices, and ongoing cost efficiencies.
Performance Review
The company’s core net profit for the first six months of 2025 (6M25) reached RM69 million, falling short of expectations by constituting only 44% of the full-year forecast. This underperformance was primarily attributed to weaker-than-expected FFB production, which saw a 4% year-on-year contraction in 1H25. Revenue in the second quarter of 2025 also registered a 15% year-on-year decline, while average CPO selling prices moderated quarter-on-quarter. Despite these headwinds, the CPO unit production cost in 2Q25 eased quarter-on-quarter to RM2,577/MT, down from RM2,634/MT in 1Q25, primarily due to improved mill efficiencies. However, unit costs remained 3% higher year-on-year for 6M25, impacted by elevated labor costs and reduced output, with softer Palm Kernel (PK) credit further weighing on margins. Management has indicated that 2025 costs could exceed RM2,200-2,300/MT if the production recovery lags.
Future Outlook and Strategic Drivers
Analysts anticipate a meaningful recovery in earnings for 2H25, underpinned by a projected broadly flat FFB production for 2025E (+1% year-on-year). While average realised CPO prices are expected to gradually ease from RM4,309/MT in 2024 to RM3,920/MT by 2027E, the near-term CPO sentiment remains firm. This is supported by robust restocking demand from key markets like India and China, firmer soybean oil prices, and supportive policy developments in Indonesia, including the Domestic Market Obligation (DMO) scheme and the proposed B50 biodiesel mandate starting 2026, which could significantly boost demand.
The company’s strong commitment to sustainability, evidenced by its RSPO, ISCC EU, and MSPO certifications, is a crucial strategic asset, supporting premium pricing and capturing growing global demand for sustainably produced palm oil. Structural challenges persist, including rising fertiliser and labor costs, along with regulatory uncertainties, which are expected to contribute to cost volatility in the near term. However, the company benefits from a healthy balance sheet and stable cash flows, supporting an attractive projected dividend yield of 5% over 2025-2027E.
Investment Recommendation
The investment bank maintains a HOLD recommendation for the stock, with a 12-month target price of RM1.80. This target price is pegged to an 11x 2026E EPS, which aligns with its 5-year historical mean. Key risks to this outlook include production volatility, fluctuations in palm product prices, cost inflation, and evolving regulatory landscapes.
