Investment Highlights

• Maintain HOLD on TH Plantations (THP) with a lower fair value of RM0.61/share (vs. RM0.70/share previously). Our fair value implies an FY19F PE of 27x.

• Assuming a share price of RM0.68, which is a 20% premium to THP’s current price, we estimate that it would cost a mere RM157.2mil for Lembaga Tabung Haji to privatise THP.

• We are now forecasting that THP would be recording a net loss of RM13.9mil for FY18E compared with a net profit of RM15.2mil originally. The earnings revision accounts for a lower FFB production growth of 3% vs. 10% previously and a weaker plantation EBITDA margin.

• We have also revised THP’s FY19F net profit downwards by 35.9% to account for a lower CPO price assumption and softer plantation EBITDA margin. We have assumed an average CPO price assumption of RM2,300/tonne for FY19F vs. RM2,500/tonne previously.

• THP's 9MFY18 results were below our expectations and consensus estimates. THP swung into a net loss of RM19.8mil in 3QFY18 compared with a net profit of RM0.2mil in 2QFY18. The poor results can be attributed to the plunge in CPO price, weak sales volume of CPO and higher production costs.

• Included in THP’s 9MFY18 net profit were fair value gains on biological assets of RM3.9mil (9MFY17: losses of RM7.9mil) and fair value gains on a government grant of RM2.3mil (9MFY17: gains of RM12.6mil).

• Although THP’s FFB production inched up by 3.5% YoY in 1HFY18, the group’s FFB purchases fell by 27.5%. As a result, the amount of FFB processed shrank by 7.0% YoY and the production of CPO declined by 5.1% YoY in 1HFY18.

• We believe that FFB purchases fell as THP was affected by the temporary shutdown of a palm oil mill in Sarawak. The mill was shuttered for inspections in 1HFY18.

• Apart from the plunge in CPO price, THP’s production cost also increased. The group’s production cost (ex-mill and ex-depreciation) rose by 9.2% from RM1,299/tonne in 1HFY17 to RM1,418/tonne in 1HFY18.

• Average CPO price slid by 18.1% from RM2,723/tonne in 1HFY17 to RM2,229/tonne in 1HFY18. Average palm kernel price contracted by 23.9% from RM2,412/tonne in 1HFY17 to RM1,835/tonne in 1HFY18.

Source: AmInvest Research - 27 Nov 2018