Hap Seng Plantations Holdings Bhd's (HSP) prospects have been viewed positively by analysts, driven by better prospects from its Sabah estates.

Following a recent visit, Kenanga Investment Bank Bhd's research arm (Kenanga Research) said it came away with a slightly better production outlook on the company thanks to the good pace of yield recovery, while remaining positive for the long run on cost-reduction measures and solid balance sheet position, supporting above-average dividend yields.

"Management noted that with good weather and stable labour availability, its Sabah estates are seeing a decent yield outlook in spite of some mid-2016 droughts.

"As such, management expects to see flat fresh fruit bunches (FFB) growth in 2017, compared to a previously guided year-on-year (y-o-y) decline.

"Accordingly, we adjust our FY17 to FY18E FFB growth forecasts from minus two per cent and six per cent to two and five per cent, respectively" it said, noting that its FY18E growth is slightly lowered by one percentage point (ppt) due to a higher base production in FY17.

It added, "While HSP's production growth is lower than the sector average of eight per cent, we believe this is offset by the group's above-average yield (circa 22 metric tonnes per hectare against the Malaysian average of circa 18MT per ha).”

Aside from that, the research team also pointed out that HSP has begun generating power via its new bio gas plant project, which would lower diesel costs for power generation, and allows for additional tax credits, which would be fully utlilised in FY17.

This move could potentially reducing tax expense by 10 to 15 per cent, it said.

"Management also noted that they have switched their trucking services from an internal workshop basis to a leasing basis which will reduce maintenance cost, while improving reliability and reducing downtime" Kenanga Research added.

On the company's FY17 price outlook, the research team noted that HSP mentioned it expect to see FY17E CPO prices average RM2,845 per MT or eight per cent higher than FY16 average of RM2,643 per MT due to the high prices seen in the first half of 2017 (1H17).

"This is higher than our own forecasted RM2,550 per MT, providing for potential upside should prices be sustained till late 3Q to 4Q17" it said.

"Management noted that August production could be slightly weaker month-on-month (m-o-m) on pullback from strong July performance, but production could still see a later peak in October to November which would be negative for prices.

"We concur that the production peak has yet to be seen for the year and hence maintain our outlook of price volatility as more clarity in production is seen in later parts of the year" the research team said.

All in, it adjusted its FY17 to FY18 core net profit estimates by two to four per cent or RM130 million to RM132 million, after accounting for better yield production and improved cost efficiencies.

Kenanga Research retained an ‘outperform' call on the stock.