Stripping out i) gain from fair value adjustment of FFB (RM2.6m), ii) fair value gain on forward currency contracts (RM2.7m), iii) unrealized FX loss (RM13.8m) and iv) net gain on disposal of assets held for sale and PPE (RM27.5m), TSH 1HFY23 core profit slumped 86% YoY to RM20.5m. The weak results were below our and the consensus full-year expectations, accounting for 20% and 21% respectively. Despite the weaker-than-expected results, we expect to see a strong catch-up in 2H on the back of recovery in CPO prices amid high production season. Maintain Neutral with an unchanged TP of RM1.10 based on 13x FY24 EPS. No dividend was declared for the quarter.

• 2QFY23 revenue (QoQ: +2.5%, YoY: -39.5%). Revenue was weaker at RM257m, mainly attributed to lower plantation revenue. Plantation revenue dropped 39% YoY to RM241m, dragged by a decline in CPO prices and lower FFB production. 2QFY23 average CPO prices slipped from RM5,076/mt to RM3,493/mt (1HFY23: RM3,523/mt, YoY: -28.7%) while average PK prices tumbled from RM3,290/mt to RM1,785/mt (1HFY23: RM1,778/mt, YoY: -50.4%). 2QFY23 FFB production fell 7.2% YoY to 222,119mt (1HFY23: 421,453mt, YoY: -3.6%), mainly dragged by weaker production from Indonesia (-8.1%), partially mitigated by higher Malaysian production (+8.8%). Sales contribution from non-core businesses sank 42% YoY to RM16.1m as a result of low demand for wood products and lower production of latex.

• 2QFY23 core earnings tumbled 79% YoY. 2QFY23 earnings would have been better if not because of the hefty Indonesian export levy and duty on CPO amounting to RM33.7m. Stripping out the exceptional items, the Group’s core earnings tumbled 79% YoY to RM16.6m, dragged by weaker plantation earnings and higher production cost. Other businesses saw a bigger loss of RM2m, up from RM1.7m. Meanwhile, earnings contribution from its 21.9%-owned Innoprise Plantations sank from RM6.7m to RM1.8m.

• Outlook guidance. Management sees a FFB production growth of 5% for FY23 following the disposal of two plantation estates in Sabah. CPO production cost is expected to increase to increase to RM2,000-2,200/mt this year, likely due to a slump in palm kernel credit in tandem with the weaker CPO prices. The Group plans to replant about 500ha this year and it sees no major increase in the major areas compared to last year. Finally, management has allocated RM90m capex for FY23 to cater for infrastructure, property and plant upgrade.

Source: PublicInvest Research - 24 Aug 2023