TSH’s 2Q19 core net profit of RM10.8m (QoQ: >100%; YoY: -39.4%) took 1H19 core net profit to RM9.5m (-60.9%), accounting for 19.7-28.3% consensus and our full-year forecasts. We deem the results in line as we expect 2H to come in stronger (underpinned by higher palm product prices and seasonally stronger FFB production). Maintain FY19-20 core net profit forecasts, sum-of-parts TP of RM0.79, and SELL rating on the stock.

Within our expectation. 2Q19 core net profit of RM10.8m (QoQ: >100%; YoY: - 39.4%) took 1H19 core net profit to RM9.5m (-60.9%), accounting for 19.7-28.3% consensus and our full-year forecasts. We deem the results in line as we expect 2H to come in stronger (underpinned by higher palm product prices and seasonally stronger FFB production).

QoQ. Although average realised CPO price and FFB production were lower, 2Q19 core net profit more than tripled to RM10.8m (from RM3.4m in 1Q19), as weaker plantation showing (arising from the reasons mentioned above) was more than mitigated by higher JV contribution.

YoY. 2Q19 core net profit declined by 39.4% to RM10.8m (from RM17.8m in 2Q18), as higher earnings contribution from cocoa and bio-integration divisions, as well as JV were more than offset by lower FFB production (-8.5%) and average CPO price realised (-16.7%).

YTD. 1H19 core net profit plunged 60.9% to RM9.5m, as higher earnings contribution from cocoa and bio-integration divisions, as well as JV were more than offset by lower average CPO price realised (which declined by 17.1% from a year ago).

FFB output growth. FFB output increased by 1.1% to 405,572 mt in 1H19, driven mainly by FFB output growth in Indonesia. We anticipate FFB production growth momentum to pick up in 2H19, underpinned by better age profile and more areas moving into maturity, particularly its Indonesia operations. In our forecasts, we are projecting overall FFB output to grow by 4.5% in FY19.

Forecast. Maintain as we deem the results within our expectation.

Maintain SELL; TP: RM0.79. Maintain SELL rating, with unchanged sum-of-parts TP of RM0.79. While we like TSH for its young age profile, near-term upside is capped by its lofty valuation (at RM0.895, TSH is trading at FY19-20 P/E of 36.1x and 31.6x). Besides valuation, we note that net gearing remains high (0.9x as at 30 Jun 2019), and this will continue to limit its new planting activities.

Source: Hong Leong Investment Bank Research - 23 Aug 2019