Results

1HFY14 core net profit of RM83.4m (+92.1%) accounted for 56.7-59.2% of consensus and our full-year forecasts. We consider the results within expectations given the anticipated lower average CPO price in 2H vis-à-vis 1H.

Deviations

None

Dividends

None

Highlights

YTD… 1HFY14 core net profit increased by 92.1% to RM83.4m mainly on the back of higher FFB and CPO output, higher CPO selling prices and lower finance costs (arising from lower net debt).

QoQ... Adjusted for unrealized forex loss, 2QFY14 core net profit rose by 34.7% to RM47.8m mainly on the back of higher FFB output, lower finance costs and lower tax expense (albeit partly offset by lower CPO selling prices and weaker performance at the wood product manufacturing arm).

FFB output continued rising, registering a yoy growth of 27.4% to 319.4k mt in 1HFY14, as younger plantation areas reached 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 maintained at RM3.17 (see Figure 5).

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 given the current weak CPO price sentiment (TSH’s earnings have relatively high sensitivity to CPO price changes). Maintain Hold recommendation.

Source: Hong Leong Investment Bank Research - 27 Aug 2014