Investment Highlights

• Maintain HOLD on TH Plantations (THP) with an unchanged fair value of RM1.20/share. Our fair value implies a FY18F PE of 22x. In the past seven years, THP's PE ranged from a low of 6.6x to a high of 44.4x. Average PE was 19.1x.

• THP's 1QFY17 results were within our expectations and consensus estimates. THP swung from a net loss of RM7.1mil in 1QFY16 to a profit of RM11.2mil in 1QFY17 on the back of higher prices of CPO and palm kernel and increased FFB production.

• Included in THP's net profit was a bigger fair value loss on forestry assets of RM5.7mil in 1QFY17 compared with RM4.9mil in 1QFY16 and RM1.3mil in 4QFY16. THP also recognised deferred income of RM6.2mil in 1QFY17, which was a grant from the government for the development of forestry plantations in Sabah.

• Effective tax rate normalised to 24.9% in 1QFY17. In comparison, THP recognised a positive tax of RM6.2mil in 1QFY16. Going forward, THP's effective tax rate may be low due to deferred tax assets. Deferred tax assets resulted in positive tax expense from FY13 to FY16. We have assumed that THP's tax would be a smaller positive RM4.6mil in FY17F vs. RM23.2mil in FY16.

• THP's FFB rose by 17.2% YoY in 1QFY17 after inching up by a mere 0.8% YoY in 1QFY16. On a quarterly basis, FFB production slid by 13.5% in 1QFY17. FFB yield improved from 2.9 tonnes/ha in 1QFY16 to 3.3 tonnes/ha in 1QFY17.

• Average realised CPO price climbed by 34.1% from RM2,235/tonne in 1QFY16 to RM2,997/tonne in 1QFY17 while average palm kernel price jumped by 66.3% from RM1,888/tonne to RM3,139/tonne.

• Production cost per tonne (ex-depreciation) was RM1,357 in 1QFY17 vs. RM1,620 in 1QFY16 and RM1,290 in 4QFY16. THP's production cost was RM1,579/tonne in FY16 compared with RM1,317/tonne in FY15.

• Net gearing slipped from 79.4% as at end-December 2016 to 78.2% as at end-March 2017. Gross borrowings were unchanged at RM1.3bil as at end-March 2017.

• Operating cash flows swung from a negative RM19.3mil in 1QFY16 to a positive RM36.3mil in 1QFY17 underpinned by increased revenue resulting from higher CPO price and production.

Source: AmInvest Research - 25 May 2017