Results

• 2Q16 core net profit of RM23.2m (+49.3% qoq; +28.6% yoy) brought 1H16 core net profit to RM38.8m (-18.2%). The results came in below expectations, accounting for 33.7% of consensus and our full-year forecasts.

Deviations

• Lower-than-expected FFB output at its Indonesian estates.

Dividend

• None.

Highlights

• QoQ… 2Q16 core net profit rose 49.3% to RM23.2m mainly on higher average CPO price realized, stronger associate and JV earnings and lower tax expenses, which altogether more than offset lower FFB production. Despite the FFB output recovery in Sabah estates (which recovered by 40% qoq), output in Indonesian estates remained weak and continued to trend down further (by 24% qoq), hence dragging overall FFB production downward by 15.4% to 116k mt.

• YTD, 1H16 core net profit declined by 18.2% to RM38.8m. The weaker earnings were due mainly to lower FFB production, higher losses at the wood product divisions and finance costs, which altogether more than offset higher palm product prices and improved JV and associate performances. FFB production declined by 6.1% to 279k mt, dragged by lower FFB production in both Sabah and Indonesian estates.

Risks

• Weaker-than-expected FFB production and OER;

• A sharp increase in production cost; and

• A sharp decline in vegetable oil prices.

Forecasts

• We cut our FY16-17 core net profit forecasts by 14.9% and 5.2% respectively, largely to reflect a lower FFB yield and slightly higher production cost assumptions at the Indonesian estates.

• Post revision, we now expect TSH’s overall FFB production to decline by 7.5% in FY16 before recovering by 18% in FY17.

Rating

HOLD

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

• Negative – High net gearing and relatively stretched valuation.

Valuation

Maintain HOLD rating, with lower SOP-derived TP of RM1.77 (vs. RM1.90 previously) post downward revision in earnings forecasts.

Source: Hong Leong Investment Bank Research - 30 Aug 2016