Highlights

• A modest FFB output recovery in FY17. While FFB output will experience a recovery from FY16 (following an 8% decline in FFB output in FY16 arising from the carryover impact of El Nino in FY15), we understand that TSH’s output recovery will likely be driven mainly by its Indonesian estates. The recent output recovery in Sabah may not be sustainable in the near term, as management believes its Sabah estate may still be affected by the lingering effect of El Nino.
• Longer term FFB growth prospects remain positive. Despite having expected only a modest FFB recovery in FY17, management remains positive on its longer term FFB output growth prospects, given its young age profile. There will be a total of ~15,000 ha of planted landbank moving into mature bracket over the next 3 years.
• New planting to remain slow in FY17 on high net gearing. While new planting has slowed down significantly since FY15 (evidenced by the cash outflow on oil palm plantation expenditure, which has declined to RM83.1m in FY16 from RM120.5m in FY15), net gearing of 0.93x (as at 31 Dec 2016) remained high. This was due mainly to the devaluation of MYR against the US$ (which resulted in higher borrowings in MYR terms). We believe new planting pace will likely remain slow (estimated at 2,000 ha/year) given its high net gearing level. We believe TSH’s net gearing level will remain elevated, given: (1) the lack of strong catalysts to induce significant MYR appreciation in the near term; and (2) the completion of privatization of Ekowood (via issuance of 11.4m new TSH at RM1.90/share) will only improve TSH’s net gearing position marginally.

Catalysts

• Higher-than-expected FFB output growth;
• CPO prices strengthen further; and
• Better-than-expected performance at Ekowood.

Forecasts

• Maintained.
• Ceteris paribus, every RM100 change in our CPO price assumption will result in circa 6% change in TSH’s earnings. 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 (↔)

• While we continue to like TSH for its young tree age profile (average age of circa 7.5 years, which in turn indicates decent FFB output growth), we believe further near-term upside is capped by its pricey valuations and the current weak CPO price sentiment.

Valuation

• Maintain HOLD recommendation, with slightly higher SOP- derived TP of RM1.73 (from RM1.72 previously, see Figure 1), as we update the latest market price of Innoprise (a 22%- owned associate).

Source: Hong Leong Investment Bank Research - 04 Apr 2017