Results 

9MFY14  core  net  profit  of  RM111.9m  (+29.8%)  accounted for  79.8-80.5%  of  consensus  and  our  full-year  forecasts. we  consider  the  results  within  expectations  as  we anticipate  CPO  prices  to  remain  low  (relative  to  TSH’s average  CPO price realized  of RM2,394/mt  in 9MFY14).

Deviations

YTD…  9MFY14  core  net  profit  increased  by  29.8%  to RM111.9m  mainly  on  higher  CPO  production  (+17.6%) and  CPO  prices  (+8.9%),  as  well  as  lower  finance  costs (arising from  lower net debt.

QoQ…  3QFY14  core  net  profit  declined  by  40.2%  to RM28.6m  lower  average  CPO  price  realized  (-11.9%), widened  losses  at  the  wood  product  manufacturing segment  (arising  from  weaker  demand  from  the  European market  and  impairment  losses  on  trade  receivable  and inventories);  and (3) higher  tax expense.

FFB  and  CPO  output  increased  by  27.2%  and  17.6%  to 483k  mt  and  263.6k  mt  respectively,  on:  (1)  more  planted land  bank  reaching  maturity;  (2)  higher  mill  production capacity; and (3) higher  oil yield.

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 RM2.09
• While  we  continue  to  like  TSH  for  its  young  tree  profile (which  in  turn  indicates  strong  FFB  output  growth  going forward),  we  see  limit ed  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 - 19 Nov 2014