Investment Highlights

• We are keeping our SELL recommendation on TH Plantations (THP) with a higher fair value of RM0.45/share (vs. RM0.35/share previously). Our fair value of RM0.45/share implies a price-to-book ratio of 0.5x against 0.4x originally. As CPO prices have improved, we believe that THP’s earnings would increase.

• We have raised THP’s FY20F net profit by 28% to account for a higher average CPO price assumption of RM2,300/tonne vs. RM2,200/tonne previously.

• We are maintaining our FY19E earnings forecast for THP. Currently, we forecast a net loss of RM66.5mil for THP while the group’s reported net loss was RM58.9mil in 9MFY19. We are unsure if THP would be recording more impairments in 4QFY19.

• THP’s reported net losses widened to RM31.6mil in 3QFY19 from RM19.2mil in 2QFY19 due to a RM53.6mil impairment on property, plant and equipment.

• We think that the impairment may be related to one of THP’s oil palm estates or forestry assets. On the gross profit level, THP’s earnings improved to RM57.0mil in 3QFY19 from RM19.7mil in 2QFY19 as FFB output surged by 31.4%.

• THP was hit by weak CPO prices, rising production costs and an increase in interest expense in 9MFY19.

• THP’s interest expense surged by 31.1% YoY to RM60.6mil in 9MFY19. Due to the implementation of an accounting standard on leases, THP started recognising interest expense in respect of the lease liabilities early this year. The lease liabilities are assets such as oil palm estates and an office building, which we believe, are leased from Lembaga Tabung Haji.

• THP’s gross borrowings stood at RM1.29bil as at endSeptember 2019. Gross cash was only RM43.9mil. Net gearing edged up to a high 169.6% as at end-September 2019 from 166.5% as at end-June.

• THP has assets classified as available for sale in its balance sheet. We believe that the assets for sale are mainly oil palm estates in Sarawak. Net asset value of the assets available for sale was RM1.06bil as at endSeptember 2019.

• THP’s average CPO price realised was RM1,915/tonne in 9MFY19 vs. RM2,229/tonne in 9MFY18. Average palm kernel price declined by 38.0% to RM1,137/tonne in 9MFY19 from RM1,835/tonne in 9MFY18. THP’s FFB production grew by 4.2% YoY in 9MFY19.

Source: AmInvest Research - 27 Nov 2019