Investment Highlights

• Maintain HOLD on TH Plantations (THP) with an unchanged fair value of RM1.10/share. Our fair value implies an FY18F PE of 20x. THP's PE ranged from a low of 8.2x to a high of 31.9x in the past five years. Average PE was 21.7x. We are keeping THP's FY18F net profit forecast for now.

• THP's FY17 net profit was below our expectations and consensus estimates due to a high effective tax rate of 64.6% in 4QFY17. The effective tax rate was above the statutory rate due to an increase in deferred tax expenses recognised. THP's effective tax rate was 41.5% in FY17 vs. a positive tax expense in FY16. After recognising positive tax expense from FY13 to FY16, THP's effective tax rate shot up in FY17.

• Interestingly, THP's depreciation expense declined from the previously reported number of RM29.9mil in 3QFY17 to RM10.6mil in 4QFY17 due to two reasons. First, THP extended the useful life of assets such as buildings, plant and machinery to be in line with the industry. Second, THP has made assumptions of FFB yield for each estate instead of a total sum for the entire group.

• Operationally, THP's gross profit rose by 38.6% to RM241.8mil in FY17 underpinned by improved CPO price and production and a government grant of RM12.6mil. As mentioned previously, the government grant is for the development of forestry plantations in Sabah.

• Average CPO price realised rose by 8.5% from RM2,463/tonne in FY16 to RM2,672/tonne in FY17. Average palm kernel price increased by 3.3% from RM2,365/tonne in FY16 to RM2,444/tonne in FY17.

• THP recorded an FFB production growth of 21.3% in FY17. CPO output expanded by a lower 11.9% in FY17 due to a 69.3% jump in sales of FFB to external parties.

• THP's cost of production (ex-depreciation) edged down to RM1,570/tonne in FY17 from RM1,579/tonne in FY16.

• Fair value change on forestry assets amounted to a gain of RM4.3mil in FY17 compared with a loss of RM15.3mil in FY16. Comparing 4QFY17 against 3QFY17, fair value gain on forestry assets widened from RM3.3mil to an estimated RM12.2mil.

• Net gearing stood at 83.1% as at end-December 2017 vs. 84.2% as at end-September. Operating cash flows increased from RM17.2mil in FY16 to RM179.2mil in FY17.

Source: AmInvest Research - 1 Mar 2018