Results

1H12 net profit of RM37.2m (+25.3%) accounted for 42.6% and 40.1% of our and consensus full-year forecasts. We consider the results within our expectation as we expect 2H to come in stronger on the back of higher FFB output.

Deviations

-

Dividends

-

Highlights

YTD. Net profit grew by 25.3% yoy to RM37.2m mainly on the back of: (1) A sharp increase in FFB production (which was in turn due to an increase in harvesting area in Indonesia and the absence of tree stress that resulted in a much lower FFB output in its Sabah estate last year); (2) A sharp improvement in JV contribution (which we believe is due to lower raw material cost that resulted in better refining margin); (3) Turnaround at the wood product division; and (4) Lower finance costs.

QoQ. 2Q13 net profit declined by 13.4% qoq to RM17.3m, mainly on the back of a seasonal decline in FFB production and higher forex losses.

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.

Forecasts

Maintained.

Rating

SELL

Negatives - (1) High net gearing ratio; and (2) Weak nearterm 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 2014 plantation earnings, market value of associate and subsidiary, and DCF of biomass). While we like TSH for its strong FFB output growth (which we forecasted to expand at 2-year CAGR of 24% to 655k tonnes in 2014), we believe the absence of demand and price catalyst of CPO, coupled with pricey valuations (at 17.8x 2014 P/E) will drag share price performance. Maintain our Sell recommendation on the stock.

Source: Hong Leong Investment Bank Research - 21 Aug 2013