Results

FY13 core net profit of RM129.7m (45%) came in slightly ahead of our expectation, exceeding our forecast by 7.1%. Against the consensus, the results came in much stronger, at 123.1% of consensus estimates.

Deviations

Better-than-expected performance at the wood product manufacturing division and the JV entity.

Dividends

Proposed a final single tier DPS of 3.5 sen, higher than our projected DPS of 2.5 sen.

Highlights

YTD. Although realized average CPO price declined by 15.1% (to RM2,251/tonne), FY13 core net profit rose by 45% to RM129.7m mainly on the back of: (1) A 27.8% increase in FFB production, which has in turn resulted in lower production costs (per tonne) at the plantation division; and (2) A turnaround at the wood product division (thanks to higher sales volume and lower operating cost).

QoQ. 4Q13 core net profit increased by 1.5% to RM43.5m, as better economies of scale at the plantation segment (which in turn was due to higher FFB production and palm product prices) and lower finance costs were partly negated by the absence of reinvestment allowances (which resulted in RM6.9m tax writeback in 3Q13).

Risks

• Weaker-than-expected FFB production and OER;
• A sharp increase in production cost; and
• A sharp decline in vegetable oil prices.

Forecasts

Maintained, as we believe our FY14-15 earnings forecasts have adequately reflected TSH’s strong FFB output growth going forward.

Rating

Trading 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 raised by 1 sen to RM3.13 as we updated the share prices of subsidiary and associate. Downgrade from Buy to Trading BUY following the recent share price run-up. 

Although our SOP-derived TP provides a total potential return of only 5.5% (including a projected DPS of 2.5 sen), we believe share price could potentially overshoot our TP in the short term, as TSH is one of the major beneficiaries from the recent CPO price run-up. Based on our sensitivity analysis, every RM100 rise from CPO price assumption will lift our FY15 earnings forecast and TP by 8.4% and 6.1% respectively.

Source: Hong Leong Investment Bank Research - 26 Feb 2014