Investment Highlights

• Maintain HOLD on TH Plantations (THP) with a lower fair value of RM1.10/share, which implies an FY18F PE of 20x. We have reduced THP's FY18F net profit by 8.1% to account for a more conservative EBITDA margin of 33.5% vs. 35% previously (FY17E: 31.3%). We were too aggressive in our original assumption.

• THP is expected to continue reducing its borrowings in FY18F by disposing non-core assets. A few of these assets include oil palm estates, which are old and not strategically located, and forestry plantations in Sabah.

• Ideally, THP would like to reduce its net gearing to 50% or below. For THP's net gearing to drop to 50%, we estimate that its net debt would have to fall by more than RM300mil in FY18F. As at end-September 2017, THP's gross borrowings amounted to RM1,267.1mil while net gearing was 84.2%. We have not accounted for any asset disposal in THP's FY18F net profit.

• Operationally, we have assumed that THP's FFB production would grow by 10% in FY18F vs. 15% in FY17E. THP's FFB output growth was 17.9% YoY in 11M2017.

• THP's FFB production is expected to be driven mainly by Sarawak. Sarawak is estimated to account for half of group FFB output. THP's oil palm trees in Sarawak are young as reflected in the average age of eight years old.

• THP's FFB yields are anticipated to be below 20 tonnes/ha in the coming few years due to the age profile of its oil palm trees. We have assumed an average FFB yield of 17.5 tonnes/ha for THP in FY18F.

• A large 51% of THP's oil palm trees are in the young maturity age of four to nine years, which have lower FFB yields while only 21% of the planted areas are in the prime ages of 10 to 19 years old. Ideally, the group would like to have 60% of its oil palm trees in the prime age of 10 to 19 years old while another 20% in the young maturity age. We believe that this would only take place in five years' time.

• Production cost (ex-depreciation and cost of external FFB) may inch up to RM1,350/tonne in FY18F from RM1,300/tonne in FY17E. In spite of the improvement in CPO production, we reckon that THP's production cost per tonne would rise in FY18F due to higher costs of fertiliser and wages. Fertiliser and wages account for 70% to 80% of production costs.

• THP has set up a sustainability team. The group plans to obtain the MSPO (Malaysia Sustainable Palm Oil) certification for all of its six palm oil mills in Malaysia. The deadline for companies without RSPO (Roundtable for Sustainable Palm Oil) certification to obtain MSPO certification is 30 June 2019.

Source: AmInvest Research - 23 Jan 2018