- We are maintaining our SELL recommendation on TH Plantations Bhd (THP) with a fair value of RM1.45/share. Our fair value implies an FY16F PE of 25x.

- Excluding the RM9mil fair value gain on timber development and an RM4.8mil positive tax expense, THP would have recorded a net loss in 1QFY15. We have revised THP’s FY15F earnings downwards by 27.9% to account for the poor results.

- Going forward, there is a possibility that THP’s effective tax rate would continue to be positive as the group still has deferred tax assets, which have not been recognised. THP’s tax expense was a positive RM5.5mil in FY13 and RM1.4mil in FY14.

- THP’s revenue contracted by 33.8% YoY to RM82.3mil in 1QFY15. FFB production slid by 19.8% from 172,002 tonnes in 1QFY14 to 137,988 tonnes in 1QFY15. On a quarterly basis, THP’s FFB output eased by 29.0% in 1QFY15.

- The previous guidance for FFB production growth in FY15F was 15% to 20% underpinned by an increase of 9,300ha in mature areas.

- We believe that THP’s FFB yield in 1QFY15 was affected by floods and the lagged impact of the dry weather, which took place in Peninsular Malaysia in early-2014. The weather was also dry in Sabah in 1QFY15.

- Average CPO price realised shrank by 13.8% from RM2,507/tonne in 1QFY14 to RM2,162/tonne in 1QFY15. Comparing 1QFY15 against 4QFY14, average CPO price improved by 5.9%.

- THP recorded a production cost (excluding depreciation) of RM1,506/tonne in 1QFY15 versus RM1,492/tonne in 1QFY14.

- We attribute the increase in production costs per tonne in 1QFY15 to a fall in CPO production, flood-related expenses and higher fertiliser cost.

- Going forward, there is a possibility that production costs would rise further due to the expansion in mature areas of 9,300ha. New mature areas amounted to 8,205ha in 1QFY15.

- To keep a check on overall costs, THP would be deferring its non-essential capex and replanting programme. The group is likely to postpone its replanting of about 2,000ha of oil palm trees from FY15F to FY16F. THP also plans to trade more aggressively by selling CPO when prices are above RM2,200/tonne.

Source: AmeSecurities Research - 28 May 2015