Investment Highlights

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

• THP's 1HFY18 results were within our expectations but below consensus estimates. We expect THP’s net profit to improve in 2HFY18 on the back of higher FFB production and lower fertiliser expenses.

• THP reported a smaller net profit of RM3.4mil in 1HFY18 vs. RM18.4mil in 1HFY17 dragged by the slump in CPO and palm kernel prices.

• Included in THP’s 1HFY18 net profit were fair value gains on biological assets of RM12.4mil (1HFY17: losses of RM11.2mil) and fair value gains on a government grant of RM2.3mil (1HFY17: gains of RM11.9mil). Excluding these two items, THP would have swung into a net loss in 1FHY18.

• Also, THP’s effective tax rate declined from 19.0% in 1HFY17 to 15.5% in 1HFY18 due to recognition of deferred tax assets. In the balance sheet, THP’s deferred tax assets stood at RM108.8mil as at end-June 2018 vs. RM110.6mil as at end-December 2017.

• Average CPO price was down by 18.2% from RM2,826/tonne in 1HFY17 to RM2,311/tonne in 1HFY18. Palm kernel price slid by 25.3% from RM2,542/tonne in 1HFY17 to RM1,899/tonne in 1HFY18.

• Although THP’s FFB production grew by 9.2% YoY in 1HFY18, sales volume of CPO fell by 0.9% due to a 5.1% drop in FFB processed. FFB processed slid as FFB purchased from third parties dropped by 35.7% YoY in 1HFY18.

• THP’s cost of production (ex-mill and depreciation) decreased from RM1,666/tonne in 1HFY17 to RM1,545/tonne in 1HFY18. The decline in production cost per tonne was mainly due to a fall in FFB purchases. FFB purchases slid as THP shut down a mill in Sarawak for inspections. In addition, there were floods in Sarawak in 1QFY18, which affected FFB supply.

• Net gearing inched up from 83.3% as at end-March to 86.7% as at end-June 2018. Operating cash flows swung from a positive RM55.9mil in 1HFY17 to a negative RM5.7mil in 1HFY18 due to the fall in CPO price.

Source: AmInvest Research - 30 Aug 2018