- We are maintaining SELL on TH Plantations Bhd (THP) with a lower fair value of RM1.53/share.

- We have lowered THP’s FY14F to FY15F earnings forecasts by 14% to 24% to account for lower operating margins. THP’s fair value of RM1.53/share is based on an unchanged FY15F PE of 25x.

- THP’s annualised 9MFY14 results were below our earnings forecast and consensus estimates. In addition to lower CPO price, the group incurred increases in effective tax rate and maintenance costs for new mature areas in 3QFY14.

- Tax expense swung from a positive RM5.1mil in 2QFY14 to a negative RM2.1mil in 3QFY14 due to a reduction in deferred tax assets.

- On a quarterly basis, THP’s net earnings slid 39.9% QoQ to RM12.1mil in 3QFY14. THP’s gross profit margin contracted from 38.9% in 2QFY14 to 37.2% in 3QFY14.

- Average CPO price realised deteriorated 16.5% from RM2,524/tonne in 2QFY14 to RM2,106/tonne in 3QFY14.

- On a yearly basis, THP’s average CPO price improved 9.7% from RM2,143/tonne in 9MFY13 to RM2,351/tonne in 9MFY14.

- FFB production climbed 25.7% QoQ to 234,852 tonnes in 3QFY14 – in line with seasonal trends. Comparing 9MFY14 against 9MFY13, THP’s FFB output rose by 5.2%.

- FFB yield was 15.5 tonnes/ha in 9MFY14 versus 17.2 tonnes/ha in 9MFY13. The decline was due to lagged impact of the dry weather, which hit Peninsular Malaysia in 1QFY14.

- THP’s cost of production (excluding depreciation) was RM1,326/tonne in 9MFY14 versus RM1,108/tonne in 9MFY13.

- Depreciation and amortisation expense climbed 12.1% to RM61.5mil in 9MFY14 on the back of new areas coming into maturity. We believe that THP’s depreciation and amortisation expense would only normalise in FY15F.

- THP’s key performance indicator (KPI) is to expand its plantation landbank by another 30,000ha by FY15F. So far, the group has acquired 6,514ha of land, thus meeting 21.7% of its KPI.

Source: AmeSecurities