Highlights

We expect FFB output growth to pick up from FY13 onwards, underpinned mainly by the increase in mature area in Indonesia (of which we expect an additional ~5,000 ha of planted land bank coming into production in 2013).

Management expects production cost to remain relatively unchanged in 2013, as higher labour cost (resulting from the implementation of minimum wage in Indonesia effective Jan 2013) will be offset by lower fertilizer price and higher FFB output in Indonesia (which we expect it to grow by more than 40% in 2013).

The pace of planting will remain at 3,000-5,000 ha p.a. the next few years. We note that TSH has unplanted land bank of close to 65,000 ha in Indonesia as at 31 Dec 2012, which means TSH will have continuous output growth from its Indonesian estates in many years to come (assuming the pace of new planting to remain over the next few years).

We expect net gearing to ease from 1.04x in 2012 to ~0.92x and 0.87x in 2013 and 2014 respectively, the gearing level is still high relative to management’s targeted debt/equity ratio of 0.8x over the longer term.

Earnings Forecasts

2013 net profit forecast trimmed by 4.9% to RM104.2m, while 2014-2015 net profit remains relatively unchanged, to reflect: (1) The export tax assumption in our CPO price assumption; and (2) Minor adjustment in our production cost assumptions. Catalysts (upside)

Higher-than-expected FFB output growth; and

CPO prices strengthen further.

Risks

Earlier-than-expected recovery in the world’s major economies, resulting in better edible oil demand and prices; and

Weather uncertainties revisit, which would in turn result in edible oil supply distortion, hence boosting edible oil prices.

Rating

SELL

• Negatives - (1) High net gearing ratio; and (2) Weak nearterm earnings outlook on low CPO price despite higher output.
• Positives - (1) Strong FFB growth; (2) Stable cash flow from alternative power plant; and (3) Favourable long term outlook of the oil palm business.

Valuation

SOP-derived TP remains unchanged at RM1.91 as the downward revision in net profit forecast was offset by an update in other parameters. While we like TSH for its strong FFB output growth, we believe upside from its current share price will be capped by: (1) The lack of positive catalyst to boost demand and price of CPO; and (2) Expensive valuations. Maintain SELL recommendation.

Source: Hong Leong Investment Bank Research - 17 Apr 2013