• TSH’s 1H17 core net profit of RM50.5m came broadly within our expectations, making up 50% of our estimates but trailed consensus estimates at 42%.

• Core PBT was up 54% yoy to RM79.3m, as revenue surged to RM546.7m (+32% yoy) due to higher contributions from both palm and other segment, as well as associated company.

• The higher operating profit is also attributable to higher ASP realized and FFB production.

• We remain positive on TSH and maintain our FY17 and FY18 earnings forecast with TP of RM2.20 (RM2.00 previously) as we roll forward our valuation to FY18 earnings.

• Upgrade from HOLD to BUY.

Earnings broadly in-line

TSH’s 1H17 revenue surged 32% yoy to RM546.7m as higher production and ASP for CPO contributed to higher revenue in palm product segment. A higher sale of cocoa product together with higher electricity and steam sales by bio-integration division also aided in the higher revenue. Core PBT improved significantly yoy due to higher ASP of CPO realized, coupled with higher FFB and CPO production, and profit contribution from associated company. However core PBT was lower qoq mainly due to i) lower ASP realized for CPO; ii) higher finance costs; and iii) loss from jointly controlled entities. Finance cost increased 52% qoq to RM8.8m, believed to be due from adjustment in finance cost capitalized.

Higher ASP of palm product

In 1H17, palm product division posted revenue and segment profit of RM481.9m (+37% yoy) and RM96.8m (+56% yoy) respectively mainly due to a higher average CPO price realized of RM2,805/MT (1H16: RM2,309/MT) and higher FFB and CPO production. In the coming quarter, production is expected to continue its upward momentum as yield improves due to better age profile as well as waning impact of El-Nino. Plantation margin during the period improved to 20.1% from 17.6% in 1H16.

Positive on TSH outlook, upgrade to BUY

We maintain our FY17 and FY18 earnings forecast with Target Price of RM2.20, based on FY18’s EPS and PER of 26.7x. We ascribed a valuation of +1 SD above its 5-year average PER of 20x, given its position as a pure planter with long-term earnings growth potential. This is justified by its 1) young age profile; 2) enlarged unplanted land bank size of 57,423 hectares; and 3) potential yield enhancement as it has a high ratio of immature to young matured estates of 64%. Upgrade to BUY.

Source: BIMB Securities Research - 25 Aug 2017