Results

• 2Q17 core net profit of RM24.4m (qoq: -6.4%; yoy: +5.1%) took 1H17 core net profit to RM50.5m (+30.2%). The results came in below expectations, accounting for only 34.5-42.1% of our and consensus full-year forecasts.

Deviations

• Higher-than-expected finance costs.

Dividend

• None.

Highlights

• QoQ… 2Q17 core net profit declined by 6.4% to RM24.4m, as the seasonal recovery in FFB production was more than offset by lower CPO prices and JV losses.

• YoY… 2Q17 core net profit rose by 5.1% to RM24.4m, driven by higher FFB production and CPO prices, but partly offset by higher finance costs (resulting from higher amount of finance costs being expensed as more areas moving into the mature bracket, we believe) and weaker JV performance.

• YTD… 1H17 core net profit rose 30.2% to RM50.5m, boosted mainly by higher FFB production and CPO prices (which have in turn resulted in operating profit at the plantation division rising by 55.7%), but partly offset by higher finance cost and weaker JV performance.

• FFB production remained on an uptrend (both qoq and yoy) to 176k mt in 2Q17, and we believe this was achieved on: 1) mild FFB yield recovery at existing mature areas; and (2) More areas moving into mature bracket. For the full year, we project FFB output growth of 18.1%, underpinned by FFB yield recovery and the young age profile at its 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

• FY17-19 core net profit forecasts are lowered by 6%, 6.5% and 5.6%, largely to account for higher finance cost assumptions.

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 (0.91x as at 30 Jun 2017).

Valuation

• Post net profit forecast revision, SOP-derived TP is lowered by 6.4% to RM1.60 (see Figure 5). Maintain HOLD recommendation.

Source: Hong Leong Investment Bank Research - 25 Aug 2017