TSH’s 1Q19 core net profit of RM1.5m (QoQ: -87.5%; YoY: -77.6%) came in below expectations, accounting for only 2.1-2.2% of our and consensus fullyear estimates, mainly due to lower-than-expected palm products prices and higher-than-expected finance costs. We lower our FY19-21 core net profit forecasts by 35.5%, 27.9% and 25.4%, respectively, largely to reflect lower palm product prices realised YTD, higher production cost and finance cost assumptions. We will be reviewing our projected average CPO price assumptions post reporting season. Maintain HOLD rating with lower SOPderived TP of RM0.98 (from RM1.05 earlier) as we lower our core net profit forecasts and roll forward our valuation base year to FY20.

Missed expectations. 1Q19 core net profit of RM1.5m (QoQ: -87.5%; YoY: -77.6%) came in below expectations, accounting for only 2.1-2.2% of our and consensus fullyear estimates. Lower-than-expected palm products prices and higher-than-expected finance costs were the key deviations against our forecast.

QoQ. 1Q19 core net profit fell 87.5% to RM1.5m, as improved earnings from cocoa segment was more than offset lower palm product prices, higher finance costs and significantly higher tax expense.

YoY. 1Q19 core net profit declined by 77.6% to RM1.5m as higher FFB production (+13%) and improved earnings from cocoa segment were more than offset by sharply lower palm product prices, with average CPO and PK prices declining by 17.5% and 40.6% to RM1,911/mt and RM1,214/mt respectively.

FFB output growth. FFB output increased by 13% to 204,555 mt in 1Q19, driven mainly by strong FFB output growth in Indonesia. We opine Indonesia operations will continue to drive FFB output growth at the group, thanks to its young age profile. In our forecasts, we are projecting overall FFB output to grow by 4.5% in FY19.

Forecast. We lower our FY19-21 core net profit forecasts by 35.5%, 27.9% and 25.4%, respectively, largely to reflect lower palm product prices realised YTD, higher production cost and finance cost assumptions. We will be reviewing our projected average CPO price assumptions post reporting season. Our sensitivity analysis indicates that every RM100/mt change in our average CPO price assumptions will change our FY19-21 core net profit forecasts by circa 16%.

Maintain HOLD with lower TP of RM0.94. Maintain HOLD rating with lower SOPderived TP of RM0.98 (from RM1.05 earlier) as we lower our core net profit forecasts and roll forward our valuation base year to FY20.

Source: Hong Leong Investment Bank Research - 3 Jun 2019