Results

1QFY14 core net profit of RM35.5m (yoy: +62.7%; qoq: - 18.3%) accounted for 22.5-23.2% of our and consensus full-year forecasts. We consider the results within expectations as FFB output is traditionally weaker during 1Q.

Deviations

None

Dividends

None

Highlights

YoY… 1QFY14 core net profit increased by 62.7% to RM35.5m mainly on the back of higher FFB output (+21.5%), average CPO selling price (+18.3%), as well as a turnaround at the associate unit.

QoQ… 1QFY14 core net profit declined by 18.3% to RM35.5m, as higher average CPO price (+6.3%) and a turnaround at the wood product manufacturing arm were more than offset by seasonally weaker FFB output (-2.7%), higher finance cost and higher tax expense.

FFB output in 1QFY14 grew by 21.5% yoy to 157k tonnes, as younger plantation areas reaching maturity. For the full year, we are projecting TSH’s FFB output to rise by ~20% to 649k tonnes.

Risks

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

Forecasts

Maintained. Based on our sensitivity analysis, every RM100 rise in CPO price assumption will lift our FY15 earnings forecast and TP by 8.4% and 6.1% respectively.

Rating

HOLD

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

Negative – High net gearing and relatively stretched valuation.

Valuation

SOP-derived TP raised marginally (by 3 sen) to RM3.16 as we updated the share prices of subsidiary and associate (i.e. Ekowood and Innoprise).

While we continue to like TSH for its young tree profile (which in turn indicates strong FFB output growth going forward), we see limited upside potential to its share price following the recent share price run-up. We downgrade our recommendation on the stock from Trading Buy to Hold.

Source:Hong Leong Investment Bank Research - 23 May 2014