Investment Highlights

• Maintain HOLD on TH Plantations (THP) with a lower fair value of RM0.70/share (vs. RM0.80/share previously). Our fair value implies an FY19F PE of 20x.

• Excluding the fair value gain on biological assets of RM3.5mil (1QFY17: loss of RM10.9mil) and fair value gain on a government grant of RM2.3mil (1QFY17: RM6.2mil), we estimate that THP would have been in a net loss of RM2.6mil in 1QFY18.

• We have cut THP’s FY18F net profit by 23.8% and FY19F net earnings by 13.9% to account for weaker operating profit margins.

• THP's 1QFY18 results fell short of our expectations and consensus estimates. The group was hit by falls in CPO price and sales in 1QFY18.

• Although THP’s FFB production rose by 14.2% YoY in 1QFY18, FFB processed shrank by 9.5% due to a drop in FFB purchased from external parties. As a result, sales volume of THP’s CPO declined by 9.9% YoY in 1QFY18.

• In addition to operational weaknesses, THP recorded a higher effective tax rate in 1QFY18. THP's effective tax rate rose from 24.9% in 1QFY17 to 44.4% in 1QFY18 due to lower recognition of deferred tax assets.

• Average CPO price slid by 21.4% from RM2,997/tonne in 1QFY17 to RM2,355/tonne in 1QFY18. Palm kernel price eased by 31.8% from RM3,139/tonne in 1QFY17 to RM2,140/tonne in 1QFY18.

• Cost of production (ex-mill and depreciation) was RM1,334/tonne in 1QFY18 vs. RM1,367/tonne in 1QFY17. The decline in production cost per tonne in 1QFY18 was mainly due to a 10% fall in estate costs. THP's cost of production was RM1,570/tonne in FY17.

• Net gearing stood at 83.3% as at end-March 2018 compared with 81.3% as at end-December 2017. Operating cash flows swung from a positive RM36.3mil in 1QFY17 to a negative RM11.2mil in 1QFY18. Capex slid from RM6.0mil in 1QFY17 to RM3.9mil in 1QFY18.

Source: AmInvest Research - 31 May 2018