• THP aims to drive better performance through its 5-year Business Plan known as Al-Falah, focusing on strengthening efforts in operational efficiencies, implementing good agronomic practices, rehabilitation, replanting initiatives, and advancing mechanization programs.

• The goal is to achieve a Fresh Fruit Bunch (FFB) yield of 22 MT/Ha and an Oil Extraction Rate (OER) of 22% by 2028.

• Through its previous Strategic Recovery and Consolidation Plan, THP was able to reduce its high gearing ratio from 1.57x in 2019 to 0.63x in 2023.

• We revised our FY24F and FY25F earnings forecast higher to RM35.6mn and RM40.5mn respectively (RM32.2mn and RM37.1mn previously), after factoring in higher assumptions for ASP for CPO and lower cost estimates.

Is it Worth Looking at THP?

TH Plantations (THP) is a pure upstream plantation company with a total land bank of 97,781 hectares, primarily located in Peninsular Malaysia, Sabah and Sarawak, as well as a small presence in Kalimantan, Indonesia. As a pure planter, the company’s earnings are closely tied to fluctuations in crude palm oil (CPO) prices and production levels. Our sensitivity analysis reveals that for every RM100/MT change in CPO prices, there is a corresponding change of approximately +/- 5% in profit.

Over the past several years, THP has focused on deleveraging its substantial net debt, which stood at RM822mn in 2023 (down from a high of RM1.3bn in 2019). Additionally, THP has plan to earmarked more than MYR700mn worth of its assets for sale. In 2023, the group had a total oil palm planted area of 55,715 hectares, with an FFB production of 787,741 tonnes and a yield of only 15.18 MT/Ha. We believe THP’s performance could have been better if not for the Sarawak estate rehabilitation, which has affected their yield and production.

Strategic Recovery and Consolidation Plan

THP implemented a comprehensive Strategic Recovery Plan (SRP) in 2019, aimed at stabilizing and strengthening its operations and financial position. The plan comprised two main phases: Rationalization and Transformation. During the Rationalization phase, THP focused on optimizing its asset base and improving its capital structure by divesting non-performing subsidiaries. In 2019, the company divested its stakes in Bumi Suria Ventures Sdn. Bhd. and Maju Warisanmas Sdn. Bhd., which together owned 6,513.80 hectares of oil palm plantations in Sarawak, and entered agreements to sell its 70% equity interest in THP-YT Plantation Sdn. Bhd. The Transformation phase aimed to enhance operational efficiency and sustainability. THP implemented cost reduction measures, such as minimal field upkeep and reduced fertilizer application, while focusing on yield and mechanization improvements. The deployment of Mechanical Buffalos and Mechanical Spreaders, along with the automation of FFB collection, significantly increased its productivity. By 2023, THP concluded the Transformation Phase of its Strategic Recovery Plan as well as completed its rehabilitation and consolidation programme, setting the stage for the group to become a more efficient plantation company.

The strategic initiatives have significantly improved the company’s balance sheet and liquidity, reducing the gearing ratio from 1.57x in 2019 to 0.63x in 2023. These efforts also resulted in a notable financial turnaround from a pre-tax loss of RM245.01mn in 2019 to a pre-tax profit of RM85.9mn in 2023, despite lower YoY growth. The lower growth was mainly due to a decrease in CPO ASP from a high base in 2022, caused by tight edibles oil supply due to weather issues, supply-chain disruptions from Covid-19, the Ukraine-Russia tension, and Indonesia's policy on palm oil exports.

Future Growth Trajectory through AL-Falah 22/22.

Following the successful conclusion of the Transformation Phase, THP has introduced its next significant strategic initiative: the 5-year Business Plan (2024-2028), known as AL-Falah 22/22. This plan aims to reinvent the THP Group's business model by targeting enhancements in financials, operations, and human resources to drive sustainable growth and long-term profitability. Central to this initiative is the ambitious goal of raising the FFB yield to 22 MT/Ha and achieving an OER of 22% by 2028, up from the 2023 benchmarks of 15.18 MT/Ha FFB yield and 19.17% OER achieved in 2023. Although these figures are below the industry averages of 15.79 MT/Ha for FFB yield and 19.86% for OER, we believe THP has the potential to meet these targets and improve its profitability through continued implementation of proper initiatives under AL-Falah.

• Leveraging THP's Healthy Tree Age Profile. THP's tree age profile is advantageous, with a majority of trees at mid-prime maturity stages averaging around 13 years old, which is ideal for optimal yield. Additionally, THP has a steady pipeline of younger trees that will reach maturity in the coming years and plans to replant 5% of the matured area, ensuring a consistent supply of FFB for milling operations. This prime tree age profile, combined with Good Agronomic Practices (GAP) initiatives, is expected to enhance yield and drive higher revenue growth.

• Enhancement of Mechanization. Efforts to increase mechanization across THP's estates have already shown positive results, currently covering 62% of the total area (Peninsular Malaysia: 72%, Sabah: 68%, Sarawak: 45%). Mechanization has led to significant cost savings, reducing expenses related to labor recruitment, accommodations, and utilities by approximately RM5mn-6mn per annum. Moving forward, the mechanization effort is expected to increase productivity, with harvester productivity anticipated to rise from 1.5-1.8 MT/harvester to 2.0- 2.5 MT/harvester, thereby reducing dependency on foreign labour.

• Higher Yield Excluding the Sarawak Estate: Based on our estimates, excluding the Sarawak subsidiaries under assets held for sale, the 2023 FFB yield could be higher at circa 17.7 MT/Ha as opposed to 15.18MT/Ha when including these estates. This indicates that with ongoing good operational initiatives, THP is well-positioned to achieve its AL-Falah targets ahead of schedule.

Unlocking THP’s Growth Potential through Value Creation Initiative (VCIP)

Moving forward, THP is exploring new business opportunities to widen its income pool and improve business margins through the Value Creation Initiatives Plan. Some of these initiatives include:

• Proposed THP Forestry Business Turnaround. THP is seeking opportunities and exploring collaborations to enhance the potential of its teak and rubber tree plantations beyond traditional uses. This initiative aims to unlock new business opportunities, create greater synergies, and generate additional revenue.

• Business Collaboration in Oil Palm Waste Management and Land Assets. Recently, THP through its wholly owned subsidiary THP Applications & Services Sdn. Bhd. has entered into a joint venture (JV) with Cenergi RE Sdn. Bhd., holding 40% and 60% stakes respectively, for a Renewable Energy project. This JV aims to establish a 1.2MW biogas power plant on a build-own-operate-transfer (BOOT) basis, utilizing Palm Oil Mill Effluent (POME) from Bukit Lawiang Palm Oil Mill. The plant will generate electricity to be sold to Tenaga Nasional Berhad (TNB) under a 21-year agreement through the Sustainable Energy Development Authority (SEDA) program at a rate of approximately 42 sen/kWh. Commercial operations are expected to commence by late 2025. We estimate the group might gain a profit of around RM130k to RM150k per annum from this equity stake. Looking ahead, this income stream has the potential for further expansion across other estates, supporting sustainability efforts and enhancing long-term profitability. Additionally, leveraging on its extensive land bank, THP could also explore the development of solar farms, particularly in Sarawak, of which electricity produced could be linked to the Sarawak Grid and sold to Sarawak Energy Berhad, the state-owned electric utility company.

• Proposed Business Collaboration for Premium Empty Fruit Bunch (EFB) Pellets. THP is currently exploring and looking to collaborate with qualified companies to utilise its palm fruit bunches as feedstock for producing premium EFB biofuel pellets. However, the company is proceeding cautiously in identifying a strategic partner to venture into this business, given the high technical requirements and potential penalties associated with producing premium EFB pellets that meet international regulatory standards for ESG compliance.

Earnings Revision

Moving forward, we expect THP’s performance to improve. We project FFB and CPO productions to grow at a 10% compound annual growth rate (CAGR) over FY23-26, with yield expected to improve to 17.0/18.8/20.9 metric tons per hectare for FY24/FY25/FY26F.

Overall, we revised higher our FY24F/FY25F core earnings forecast to RM35.6mn/ RM40.5mn from RM32.2mn/RM37.1mn respectively, as we revisit our assumptions for CPO average price and lower costs to better reflect our current and future expectations on THP’s business operations. Our assumption for average CPO price for FY24 and FY25 is RM3,800 and RM3,600 respectively.

Maintain Non-Rated

We have a Non-Rated recommendation on the stock. THP is currently trading at a Price-to-Book ratio (PB) of 0.78x, which is near its 10-year mean forward PB of 0.82x. We believe the stock price could have some potential upside and a re-rating, considering the positive earnings outlook moving forward.

Source: BIMB Securities Research - 19 Jul 2024