Investment Highlights

• We are maintaining our SELL recommendation on TH Plantations (THP) with a lower fair value of RM0.35/share vs. RM0.45/share previously. Our fair value of RM0.35/share for THP implies a price-to-book ratio of 0.4x.

• THP’s 1HFY19 results were within our expectations but below consensus estimates. Consensus had forecast a net loss of RM30.8mil for FY19E but THP had already recorded a net loss of RM27.2mil in 1HFY19.

• We think that it would be difficult for THP to turn around in the next few quarters as its interest expense had increased. THP’s interest expense rose by 32.3% YoY to RM40.6mil in 1HFY19 as the group recognised interest for a lease liability. Included in THP’s 1HFY19 net loss was a fair value gain of RM3.1mil on biological assets. Without the fair value gain, THP would have registered a larger net loss of RM30.3mil in 1HFY19.

• THP was hit by a drop in palm product prices and increases in interest expense and production costs in 1HFY19.

• Average CPO price realised fell by 17.1% to RM1,915/tonne in 1HFY19 from RM2,311/tonne in 1HFY18. Average palm kernel price slid by 39.1% to RM1,156/tonne in 1HFY19 from RM1,899/tonne in 1HFY18. On a positive note, THP’s FFB production improved by 4.0% YoY in 1HFY19.

• Comparing 2QFY19 against 1QFY19, THP’s net loss widened to RM19.2mil from RM8.1mil. The QoQ rise in THP’s net loss in 2QFY19 was due to lower sales volume of CPO and higher production costs. THP said that its estate production cost rose by RM8.5mil QoQ in 2QFY19 due to an increase in manuring costs. Sales volume of CPO shrank by 5.0% QoQ in 2QFY19 while sales volume of palm kernel slid by 9.7%.

• THP’s retained earnings were a negative RM4.9mil as at end-June 2019 compared with a negative RM31.0mil as at end-March. In 1QFY19, THP recognised an accounting adjustment of RM45.3mil due to a change in accounting standard. This coupled with the net loss for the quarter resulted in a negative RM31.0mil retained earnings as at end-March 2019.

• However in 2QFY19, the retrospective accounting adjustment of RM45.3mil was reversed out. This resulted in the retained earnings being a smaller negative RM4.9mil as at end-June 2019.

• THP’s net gearing inched up to 166.5% as at end-June 2019 from 163.7% as at end-March. Gross borrowings stood at RM1.3bil as at end-June 2019 while gross cash amounted to RM30.8mil.

Source: AmInvest Research - 30 Aug 2019