Investment Highlights

• Maintain HOLD on TH Plantations (THP) with a lower fair value of RM1.15/share (vs. RM1.20/share previously). Our fair value implies an FY18F PE of 20x.

• THP's annualised 9MFY17 net profit fell short of our expectations but was in line with consensus estimates. We have reduced THP's FY17F net profit by 14% to account for a higher effective tax rate.

• THP's effective tax rate came in at 26.6% in 9MFY17 vs. our assumption of 5% for the full year. After four years of positive tax expense, we believe that THP's effective tax rate will finally normalise in FY17F due to the near completion of the recognition of deferred tax assets.

• THP's net profit grew by 52.2% YoY from RM19.6mil in 9MFY16 to RM29.9mil in 9MFY17 underpinned mainly by a government grant of RM12.6mil and increased CPO price and production. The government grant is for the development of forestry plantations in Sabah.

• Average CPO price realised climbed by 13.9% from RM2,391/tonne in 9MFY16 to RM2,723/tonne in 9MFY17. Average palm kernel price rose by 9.0% from RM2,212/tonne in 9MFY16 to RM2,412/tonne in 9MFY17.

• THP's FFB production increased by 15.0% YoY in 9MFY17.

• Gross profit margin improved from 30.1% in 9MFY16 to 36.4% in 9MFY17 on the back of higher selling prices of palm products. Also, THP's production cost per tonne (exdepreciation and cost of external FFB) was lower at RM1,284 in 9MFY17 vs. RM1,408 in 9MFY16 due to economies of scale resulting from an increase in the volume of production.

• Comparing 3QFY17 against 2QFY17, THP's net profit rose by 9.2% as higher CPO production cushioned the effects of a fall in CPO price. Average CPO price realised was RM2,564/tonne in 3QFY17 against RM2,664/tonne in 2QFY17.

• FFB production was 34.0% QoQ higher in 3QFY17. Production cost (ex-depreciation and cost of external FFB) was RM1,126/tonne in 3QFY17 vs. RM1,106/tonne in 2QFY17.

• THP recorded fair value losses on its forestry assets of RM7.9mil in 9MFY17 compared with RM14.1mil in 9MFY16. Comparing 3QFY17 against 2QFY17, fair value loss on forestry assets swung from RM5.6mil to a gain of RM3.3mil.

• Net gearing slid from 85.0% as at end-June to 84.2% as at end-September 2017. Operating cash flows grew from RM18.6mil in 9MFY16 to RM84.3mil in 9MFY17.

Source: AmInvest Research - 23 Nov 2017