• Results below expectations. TH Plantations (THP) reported a core net profit of RM3.2m for 1Q18 (-84.4% qoq, -67.4% yoy). The results were below expectations due to higher-than-expected interest expenses. EBIT came in in-line with our expectations.

• Weaker qoq and yoy net profit in 1Q18. The weaker qoq performance was mainly due to weaker FFB production on seasonality and weaker CPO ASP, while the poor yoy earnings were mainly dragged down by significantly lower CPO ASP.

• Expect FFB production growth of 11% yoy for 2018. We maintain our 2018 FFB production growth forecast of 11% yoy, in-line with management guidance of 10-15% yoy growth for 2018. FFB production growth in 2018 is expected to be supported by: a) the yield recovery in Peninsular Malaysia and Sabah’s estates, and b) yield increase at Sarawak’s estates where trees are moving into the prime mature stage. In 1Q18, FFB production growth was at 14.2% yoy.

• Cut 2018-20 EPS forecasts by 14%, 7% and 6% respectively to factor in higher interest expenses. We increased interest rate forecasts to 3.9-4.2% for 2018-20 from 3.6% previously (2016-17: 3.6%-3.9%). We are expecting an EPS of 3.0 sen, 4.1 sen and 4.2 sen respectively for 2018-20.

• Maintain HOLD with a lower target price of RM0.60 (from RM0.77). We adjusted our target price downwards to factor in the cut in earnings and ascribed a lower 2019F PE of 15x (-2SD of sector’s 5-year mean PE or -2.5SD of THP’s 5-year mean PE) from the previous ascribed PE of 18x. We assume a discount as we continue to see earnings risk due to high operating costs. Entry price: RM0.54.

Source: UOB Kay Hian Research - 31 May 2018