Thanks to the alert from a reader, I had a look at HapSeng Consolidated, which is normally a plantation play. Had a long look at its fundamentals, and the upswing generated by fertiliser trading alone should be sufficient to push the stock price to a much higher level.
Trading in fertiliser used to have a gross margin of between 3%-13%. The last 6 months saw the figure ballooning to 26%. In terms of EBIT contribution for the 12 months ended March 2008: Fertiliser trading contributed RM71.4m, CPO RM18.6m, Property RM8.4m, Financing RM9.6m and Quarry RM2m. That meant that fertiliser trading accounted for 67% of EBIT. Compared to 2007, the same segment only contributed 10.4% of EBIT. The figure for 2006 was 10.3%.
Is the upswing in fertiliser a short term anomaly? If it is, then the valuation won't perk up too much. Judging from the fundamentals surrounding the sub-sector, it is very likely that the prospects for fertiliser will continue for another 3-4 years at least. Even after peaking, it is likely to stay high.
In 2006-2007 the price of potash hovered around US$200/t, now it has shot up to US$700/t. Hap Seng Consolidated has hovered around the bottom 40% of its normal PER trading band for the past 6 months. I expect that to change and the stock should move up to trade at the 70% or higher historical PER trading band over the next 6 months.
The share closed at RM2.81 with decent volume on Friday. Based on the higher PER band, I can see the share breaching RM4.00 over the next 6 months. Net EPS for the most recent 12 months was 36 sen, a huge jump from 2007's 18 sen. For 2009 that should rise to 40 sen.
Under Hap Seng Sasco Fertilisers Sdn Bhd, the company is a market leader in the trading and distribution of fertilisers and agrochemicals to the plantation industry in Malaysia (approx. 700,000mt of fertilisers and 2m litres of agrochemicals per year). The company has a 50,000tpa NPK granulation plant in Lahad Datu (Naga brand) and a 2m litres p.a. glyphosate plant (Dewana Glyphosate brand). It is the largest supplier of potash in Malaysia. In Indonesia under PT Sasco, it produces 250,000t of fertilisers, and has a 20% market share in Indonesia. CPO plants are generally deficient in potash. High CPO prices and favourable market conditions enhances the usage of potash as well.
Its earnings is also underpinned by good exposure to CPO. In terms of yield per ha, its ranks second to only IOI Corp. It has 25.8t/ha compared to IOI's 26.9t/h. Its forward hedging of CPO sales will expire soon, and should allow the company to get better than the RM2,600/t price currently. Hap Seng Consolidated looks even better than China XLX and Sinofert as the latter two still has to wait for the lifting of the ceiling price to enjoy the full benefits of this upswing. (Reference price RM2.81)
p/s photo: Syafinaz & Song Hye Kyo
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