Results

• 1Q16 core net profit of RM15.6m (-37.4% qoq, -47.0% yoy) came in below expectations, accounting for 12% of consensus and our full-year forecasts.

Deviations

• Lower than expected FFB production and lower contribution from its JVs.

Dividend

• -

Highlights

• 1Q16 core net profit declined by -38.8% qoq (-47.0% yoy), attributed to lower profit from JVs and lower contribution from bio-integration & other division as well as higher corporate expenses. Nonetheless, its palm product division reported better operating profit (+7.8% qoq) on the back of better CPO price and cost saving measures despite lower FFB and CPO production.

• TSH recorded 1Q16’s FFB production of 137,399 tonnes (-31% qoq, -4.1% yoy). The sharp qoq decline in production was mainly due to seasonal factor while prolonged dry weather in 2015 especially in Sabah area has resulted weaker yoy production. Its Sabah’s estate reported significant decline in production by 36% qoq (-25% yoy) while its Indonesia’s production was down 30% qoq (+1% yoy).

• We expect FFB production to remain weak in coming quarters as its Sabah and Kalimantan’s estates have experienced prolonged dry weather last year which would affect its production in 2016. We now expect a flattish FFB production for 2016 (2-4% growth was previously assumed).

Risks

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

Forecasts

• We lower ours earnings forecasts by 9% for 2016F to factor in lower FFB production forecast and lower contribution from its JVs.

Rating

HOLD

Positives

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

Negatives

• High net gearing and relatively stretched valuation.

Valuation

Maintain HOLD recommendation with TP of RM1.90 based on SOP valuation.

Source: Hong Leong Investment Bank Research - 26 May 2016