Highlights

• More meaningful output recovery in 2017. TSH registered a 15% contraction in FFB output in 1H16 (weighed down by severe drought resulted from El Nino in end-15 and early-16). While we expect output to play a catch up in 2H16, the output recovery may not be signi ficant enough to mitigate the severe output shortfall in 1H16.

• We expect FFB output growth to resume in 2017 (driven mainly by its oil palm estates in Indonesia), on the back of the absence of major weather event as well as its young tree profile (of which 63% of its planted landbank are aged less than 7 years).

• Despite the FFB shortfall, we note that the output short fall will be partly mitigated by recent upt rend in palm oil prices, as TSH’s earni ngs are highly sensiti ve to palm oil price movements (TSH derives bulk of its earnings from upstream plantation business). Ceteris paribus, every RM100 change in our CPO price assumption will result in circa 9-10% change in TSH’s FY16-17 projected net profit.

• New planting will slow down significantly for the next 2-3 years… as management intends to bring down its gearing level to below 0.8x by 2018 from 1.13x as at end Jun-16 (vs. 1.04x a year ago, on the back of a weaker MYR, which resulted in higher net debt). While a slowdown in new planting would help strengthening its balance sheet, it would result in lower FFB output growth over the longer term (albeit marginally given its young age profile, which also indicates high output growth potential).

Catalysts

• Higher-than-expected FFB output growth;

• CPO prices strengthen further; and

• Turnaround at Ekowood.

Forecasts

• We fined-tune our FY16-17 core net profit forecasts by 0.2- 1.8% to RM97.8m and RM130.7m respectively, as we update our FFB yield assumptions. We introduce our FY18 net profit forecast at RM131.7m.

Risks

• Downside

• Weaker-than-expected FFB output;

• Escalating labour cost, which will in turn result in higher production cost; and

• Weaker-than-expected recovery in edible oil demand and prices.

Rating

HOLD

• Positives - (1) Decent FFB growth; (2) Stable cash flow from alternative power plant; and (3) Favourable long term outlook.

• Negative – (1) Rich valuations; and (2) High net gearing.

Valuation

SOP-derived TP lowered by 1.7% to RM1.74, post earnings forecast adjustments and update on valuation parameters. While we continue to like TSH for its young tree age profile (average age of circa 8.5 years, which indicates decent FFB output growth), we believe further near-term upside is capped by its pricey valuations. Maintain HOLD recommendation.

Source: Hong Leong Investment Bank Research - 27 Sep 2016