Highlights

We are projecting TSH’s FFB output to grow further by 8.6- 16% p.a. in 2014 and 2015 respectively, mainly on the back of additional land bank coming into mature stage.

TSH’s production cost in 2013 will come in lower than previous year, mainly on lower fertilizer cost and higher output, which altogether more than offset higher labour cost (from minimum wage). Beyond 2013, we believe overall production cost will remain on the downtrend, on increasing landbank reaching maturity.

The recent acquisition of 26,794 ha of plantation land in Sabah will boost TSH’s total landbank by 26% to 130k ha and net gearing from 0.55x to 0.71x. Despite the high net gearing ratio post landbank acquisition, management remains relatively comfortable with its balance sheet standing and will continue to look out for more plantation landbank and maintain its planting plan (3,000-4,000 ha per annum).

The financial performance of Ekowood will continue to improve and return to the black this year, thanks to gradual economic recovery in both Europe and rationalizing operating costs. In our 2013-2015 earnings forecasts, we have yet to factor in any profit contribution from Ekowood.

Catalysts

• Higher-than-expected FFB output growth;
• CPO prices strengthen further; and
• Better-than-expected performance at Ekowood.

Forecasts

Maintained. Ceteris paribus, every RM100 change in our CPO price assumption will result in ~6% change in our 2014 and 2015 net profit forecasts.

Risks -

downside

• Weaker-than-expected FFB output;
• Escalating labour cost, which will in turn result in higher production cost; and
• Weaker-than-expected recovery in edible oil demand and prices.

Rating

BUY

Positives - (1) Strong FFB growth; (2) Stable cash flow from alternative power plant; and (3) Favourable long term outlook of the oil palm business.

Negative – High net gearing.

Valuation

SOP-derived TP lowered by 4.9% to RM3.12, after taking into account the enlarged share base (arising from the private placements made in 2H13). Upgrade from Hold to BUY as valuation has become more compelling following the recent share price correction.

Source: Hong Leong Investment Bank Research- 29 Jan 2014