Investment Highlights

• Maintain HOLD on TH Plantations (THP) with an unchanged fair value of RM1.20/share, which is based on a FY18F PE of 20x. THP is currently trading at FY18F PE of 18.4x and FY19F PE of 18.1x. We forecast THP's dividend yield at 2.3% in FY18F based on a share price of RM1.10.

• We have assumed an FFB production growth of 15% for THP in FY17F. The group recorded a 16% YoY increase in FFB output in 8MFY17. Looking ahead to FY18F, we forecast that THP's FFB production would improve by a slower 10%.

• We understand that THP's FFB production reached its peak in August 2017. The group's FFB output is expected to be relatively flattish in 2HFY17. THP's production pattern is in line with industry trends. Plantation companies have been saying that palm oil production would not be exciting in 2H2017 due to the last leg of El Nino, which took place in 2015.

• THP's FFB production is anticipated to be driven by Sarawak. About 50% of THP's FFB production comes from Sarawak. Average age of THP's oil palm trees in Sarawak is eight years old compared with 16 years in Sabah and 11 years in Peninsular Malaysia.

• We believe that THP's operating profit margin would improve in 2HFY17 as the group had already applied most of its fertiliser in 9MFY17. Due to the wet weather, application of fertiliser is usually minimal in 4QFY17.

• Production cost (ex-depreciation and cost of external FFB) is estimated to be RM1,300/tonne in Malaysia in FY17F. Fertiliser costs are envisaged to be stable in FY17F. We believe that production cost per tonne would increase in FY18F as industry players have indicated that fertiliser prices have increased by single-digit percentage.

• We expect the pace of new plantings of oil palm in Indonesia to decline in FY18F. As THP's landbank in Indonesia is on peat soil, the group is unlikely to carry out any new planting in FY18F. Peat soil plantings are viewed unfavourably by THP's clients such as Wilmar International. Currently, THP has a landbank of 6,000ha in Kalimantan.

• We believe that THP would continue to sell assets to reduce its net gearing. A non-core asset is the rubber plantations in Sabah, which has a net book value of RM230mil. Without accounting for any asset disposal, we estimate THP's net gearing to be 67.1% as at end-FY18F vs. 73.4% as at end-FY17F.

Source: AmInvest Research - 17 Oct 2017