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 20x.

• Although THP's 1HFY17 annualised results were within our expectations and consensus estimates, we have raised THP's FY17F net profit by 7% as CPO prices in 2H2017 may be stronger-than-expected. We have assumed a higher average CPO price assumption of RM2,700/tonne vs. RM2,550/tonne previously.

• THP's net profit more than doubled YoY to RM18.4mil in 1HFY17 on the back of higher CPO price and production. Average realised CPO price was RM2,826/tonne in 1HFY17 vs. RM2,349/tonne in 1HFY16.

• Comparing 2QFY17 against 1QFY17 however, THP's core net profit shrank by 24.2% due to the declines in CPO and palm kernel prices. Average realised CPO price was RM2,664/tonne in 2QFY17 against RM2,997/tonne in 1QFY17. Average palm kernel price plunged by 36.7% from RM3,139/tonne in 1QFY17 to RM1,987/tonne in 2QFY17.

• THP's FFB surged by 14.6% YoY in 1HFY17. On a QoQ basis, THP's FFB expanded by 23.9% in 2QFY17.

• THP's production cost (ex-depreciation and cost of external FFB) slid by 13.5% from RM1,524/tonne in 1HFY16 to RM1,318/tonne in 1HFY17. We attribute the fall in production cost per tonne to economies of scale from the increase in FFB production. Comparing 2QFY17 against 1QFY17, production cost shrank from RM1,357/tonne to RM1,106/tonne.

• THP recorded fair value losses on its forestry assets of RM11.2mil in 1HFY17 vs. RM8.4mil in 1HFY16. On a quarterly basis, fair value losses on the forestry assets eased from RM5.7mil in 1QFY17 to RM5.6mil in 2QFY17. THP also recognised a government grant of RM11.9mil as deferred income in 1HFY17. The grant is expected to be used for the development of forestry plantations in Sabah.

• THP's effective tax rate was 19.0% in 1HFY17 vs. a positive tax expense of RM10mil in 1HFY16. We believe that the size of THP's deferred tax assets is declining. Hence, the group's effective tax rate is expected to normalise to the statutory tax rate of 24% in FY18F.

• Net gearing rose from 78.2% as at end-March to 85.0% as at end-June 2017. THP's gross cash dropped from RM174.6mil as at end-March to RM18.4mil as at end-June 2017 due to the redemption of the RM225mil Sukuk bonds. Operating cash flows improved from a negative RM39.5mil in 1HFY16 to a positive RM55.9mil in 1HFY17 while capex increased from RM11.9mil to RM18.0mil.

Source: AmInvest Research - 22 Aug 2017