- We are upgrading our recommendation on TH Plantations Bhd (THP) from SELL to HOLD with a higher fair value of RM1.38/share. Our fair value implies an FY16F PE of 30x. We think that there is little downside risk to THP’s share price if CPO prices rise next year on tightness of supply.

- THP’s 9MFY15 results were below consensus estimates but within our expectations. There was minimal recognition of fair value gain on timber assets in 3QFY15 as the group’s core profitability had improved on the back of a 32.5% QoQ jump in FFB production.

- In the first two financial quarters, THP would have recorded core net losses without the fair value gain on timber assets. Fair value gain on timber assets amounted to RM21.6mil in 9MFY15 vs. a mere RM0.6mil in 9MFY14.

- THP’s effective tax rate was also low at 0.3% in 9MFY15 compared to 1.4% in 9MFY14. The low effective tax rate was attributed to higher amount of deferred tax assets.

- THP’s FFB production fell by 2.5% YoY in 9MFY15 due to unfavourable weather conditions. THP’s FFB yield shrank by 14% from 15.5 tonnes/ha in 9MFY14 to 13.3 tonnes/ha in 9MFY15. We reckon that THP would not be able to meet its previous guidance for a FFB production increase of 15% to 20% in FY15F.

- Average CPO price realised declined by 11.3% from RM2,351/tonne in 9MFY14 to RM2,086/tonne in 9MFY15. On a quarterly basis, average CPO price edged down from RM2,092/tonne in 2QFY15 to RM2,036/tonne in 3QFY15.

- Production cost (excluding depreciation) was RM1,290/tonne in 9MFY15 against RM1,326/tonne in 9MFY14. Production cost per tonne was RM1,177 in 3QFY15 versus RM1,275 in 2QFY15.

- We think that the YoY decline in THP’s production cost per tonne in 9MFY15 was due to lower maintenance and fertiliser costs. THP’s mature areas rose by 13% YoY to 43,579ha in 9MFY15.

- THP’s net gearing stood at 94.2% as at end-September 2015 versus 91.3% as at end-June 2015. The increase in net gearing was due to a fall in gross cash from RM152.5mil to RM113.8mil.

Source: AmeSecurities Research - 30 Nov 2015