Investment Highlights

• We are downgrading TH Plantations (THP) from HOLD to SELL with a lower fair value of RM0.45/share (vs. RM0.61/share previously).

• Our fair value of RM0.45/share for THP implies a Price to Book ratio of 0.5x. We did not use PE to value THP as we think that the group will continue to make losses in FY19F. Outlook is bleak due to uncertainties over the group’s direction. Revenue may be affected by the sale of THP’s 14,900ha of oil palm estates in Sarawak.

• We are now forecasting that THP would record a net loss of RM53.2mil in FY19F vs. a net profit of RM20mil previously. We believe that THP’s EBITDA margin would not be exciting in FY19F due to rising costs of wages and fertiliser.

• THP registered huge net losses of RM578.2mil in 4QFY18 and RM594.6mil in FY18 due to a kitchen-sinking exercise. THP recorded impairments amounting to RM594.9mil in 4QFY18.

• About RM354mil of the impairments were in respect of THP’s oil palm estates in Sarawak, which have been classified as assets for sale. THP said that efforts to sell the assets have commenced and the sale will be completed in 12 months’ time. These estates have planted areas of 14,900ha. The estates’ net asset value was RM678.9mil in THP’s balance sheet. THP’s forestry plantations in Sabah were also impaired by RM134.3mil in 4QFY18.

• Excluding the impairments, we believe that THP would have recorded a core pre-tax loss of RM83.2mil in FY18. This was above our estimates and consensus estimates.

• Operationally, THP recorded a 2.6% increase in FFB production in FY18. In spite of this, sales volume of CPO slid by 4.6% to 182,319 tonnes in FY18 as FFB processed dropped by 6%. FFB processed fell in FY18 as THP sold more of its FFB to outside parties and decreased the amount of FFB purchases for its palm oil mills.

• According to THP, production cost (ex-mill and depreciation) declined to RM1,546/tonne in FY18 from RM1,655/tonne in FY17. THP’s average CPO price contracted by 21% to RM2,121/tonne in FY18 from RM2,672/tonne in FY17. Palm kernel price dived by 30% to RM1,709/tonne in FY18 from RM2,444/tonne in FY17.

• Net gearing stood at 150.2% as at end-December 2018 compared with 88.0% as at end-September. THP’s gross cash fell by 49.0% from RM99.2mil as at end-Dec 2017 to RM50.6mil as at end-Dec 2018. Operating cash flows contracted from RM179.3mil in FY17 to RM22.0mil in FY18.

Source: AmInvest Research - 28 Feb 2019