- We are downgrading our recommendation on TH Plantations Bhd (THP) from HOLD to SELL with a lower fair value of RM1.70/share.

- THP’s annualised 1HFY13 net profit was below our expectations and consensus estimates. We have reduced THP’s FY13F and FY14F earnings forecasts significantly.

- THP’s board of directors is mulling declaring dividends based on cash profits instead of accounting earnings. This means that the group could still be paying the same amount of dividends even though its net profit has fallen.

- Similar to 1QFY13, THP’s 2QFY13 results were hit by an increase in amortisation expense. It rose by 123.4% from RM11.9mil in 1HFY12 to RM26.6mil in 1HFY13.

- THP has a policy of amortising plantation estates when they enter maturity.

- Due to the acquisition of more than 40,000ha of estates, which were completed in December 2012 and February 2013, it is not surprising that THP’s amortisation expense jumped in FY13F.

- Excluding the depreciation and amortisation expense,THP’s production costs were about RM1,125/tonne in 1HFY13 compared with RM1,295/tonne in 1HFY12.

- FFB production climbed by 58.6% from 212,331 tonnes in 1HFY12 to 336,803 tonnes in 1HFY13 underpinned by the acquisition of oil palm estates from Lembaga Tabung Haji and Weida Bhd.

- The higher volume of palm oil production helped cushioned the fall in CPO prices.

- Average CPO price realised fell by 32.6% from RM3,106/tonne in 1HFY12 to RM2,094/tonne in 1HFY13.

- THP’s average CPO price realised in 1HFY13 was almost RM222/tonne lower than MPOB’s (Malaysian Palm Oil Board) CPO price of RM2,316/tonne due to poor quality of palm fruits produced and carried forward from last year.

- THP’s net gearing rose from 32.6% as at end-Dec 2012 to 67.9% as at end-June 2013.

- This was due to borrowings for the acquisition of 6,513ha of land in Sarawak from Weida Bhd and a group of individuals.

- In spite of the rise in net gearing, THP’s interest coverage was comfortable at 4.6x in 1HFY13.

Source: AmeSecurities