Highlights

Improved financial flexibility post placement and Pontian stake disposal. TSH’s net gearing will reduce from 1.04x (as at 31 Dec 2012) to 0.69x, below its targeted long-term net gearing ratio of 0.8x following the private placement and disposal of its 16.2% stake in Pontian (pending acceptance from other major minority shareholders of Pontian). Given the improving financial standing, management highlighted that it will embark on slightly more aggressive new planting and resumes its plan to construct a palm oil mill in Kalimantan, Indonesia.

… Remains hungry for landbank expansion. In addition, management also highlighted that it is eyeing for more landbank. Including the land acquisition announced in Jun 13, TSH has total landbank of 103,927ha, of which 35,500 ha is planted with oil palm. Assuming 60% of the unplanted landbank is plantable and new planting of 4,000-5,000 ha/year, the existing plantable reserves will keep TSH busy for the next 8-10 years.

FFB output on track to surpass 0.5m tonnes by 2013. While FFB production from Sabah estates in 2Q13 will slow from 1Q13 (due to a “shift” in production pattern last year), management remains confident that overall FFB production will surpass 500k tonnes in 2013 (from 425k tonnes in 2012) and 600k tonnes in 2014, as more land bank is coming into maturity in Indonesia. In our forecasts, we are projecting TSH’s FFB production to expand at 2-year CAGR of 24% to 655k tonnes in 2014.

Forecasts

Maintained, pending results announcement next month.

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

Rating

SELL

Negative - Weak near-term earnings outlook on low CPO price.

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 RM1.86 (15x FY14 plantation earnings, market value of associate and subsidiary as well as DCF of biomass). 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 - 25 Jul 2013