Results

• 3Q16 core net profit of RM18.9m (qoq: -18.5%; yoy: - 18.1%) took 9M16 core net profit to RM57.8m (-18.2%), accounting for 59.1% and 56.5% of our and consensus full- year forecasts. We deem the results below expectations, despite expecting stronger 4Q results (underpinned by stronger 4Q FFB output and sustained palm product prices).

Deviations

• Higher-than-expected finance costs.

Dividend

• None.

Highlights

• QoQ… Despite a flattish revenue growth, 3Q16 core net profit declined by 18.5% to RM18.9m, as higher plantation earnings (arising from FFB output recovery), reduced losses on wood product division, and higher associate and JV contribution were more than offset by higher finance costs and tax expense. FFB output increased by 30.1% to 151.3k tonnes, boosted mainly by output recovery at its Indonesian operations (while Sabah estate has yet to show improvement).
• YTD… 9M16 core net profit declined by 18.2% to RM57.8m, as higher plantation earnings (arising from higher average CPO price realized, partly offset by lower FFB output) and improved associate and JV contributions were more than offset by higher finance costs and tax expense.
• Proposed to privatize Ekowood… TSH proposed to acquire the remaining 32.5% stake in listed subsidiary Ekowood for RM21.9m (or 40 sen/share) via the issuance of 11.4m new TSH shares (at RM1.92/share). The proposed privatization allows TSH to improve Ekowood’s financial performance via a restructuring on Ekowood’s operations. The latest exercise (once completed) will result in a marginal dilution in TSH’s EPS, arising from the increased issued shares. Based on our assumptions, the latest exercise will dilute TSH’s EPS by circa 1.5%.

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 FY16-18 core net profit forecasts by 6%, 4.4% and 4.2% to RM91.9m, RM122.6m and RM126.1m, largely to account for higher finance cost assumption.

Rating

HOLD (↔)

• While we like TSH for its young age profile (which translates to strong FFB output growth prospects), further upside is capped by its pricey valuations and high net gearing (0.96x as at 30 Sep 16).

Valuation

• Maintain HOLD recommendation with lower SOP-derived TP of RM1.68 (vs. RM1.77 previously) post downward revision in earnings forecasts.

Source: Hong Leong Investment Bank Research - 01 Dec 2016