TSH’s 3Q19 core net profit of RM7.8m (QoQ: +4.9%; YoY: -55.7%) took 9M19 core net profit to RM16.8m (-60.1%), accounting for 42.5-49.9% of consensus and our full-year estimates. We consider the results within our expectation as we project a much stronger 4Q on the back of the strong recovery in palm product prices since Oct-19. Maintain FY19-21 core net profit forecasts. We raise our SOP-derived TP on TSH by 7.6% to RM1.13 (from RM1.05 previously), as we took the opportunity to roll forward our valuation base year to FY20. However, we downgrade our rating to HOLD (from Buy previously), as we believe better earnings prospects (arising from higher palm product prices) has already been reflected in recent share price run-up (which has risen by 28.2% since early Nov-19).

Within our expectation. 3Q19 core net profit of RM7.8m (QoQ: +4.9%; YoY: -55.7%) took 9M19 core net profit to RM16.8m (-60.1%), accounting for 42.5-49.9% of consensus and our full-year estimates. We consider the results within our expectation as we project a much stronger 4Q on the back of the strong recovery in palm product prices since Oct-19.

QoQ. 3Q19 core net profit increased by 4.9% to RM7.8m, mainly on the back of higher FFB output, which more than offset lower contribution from cocoa segment.

YoY. 3Q19 core net profit shrunk by 55.7% to RM7.8m, dragged by slightly lower FFB production (which declined by 1% YoY to 248k tonnes), lower palm product prices, lower contribution from cocoa segment, and higher finance cost.

9M19. 9M19 core net profit plunged 60.1% to RM16.8m, as higher contribution from bio-integration segment and marginally higher FFB production (which increased by 0.2% to 653k tonnes) were more than negated by lower palm product prices (which average CPO price realised sae a 13.6% decline to RM1,906/tonne) and higher finance cost.

FFB output. Despite its young age profile (with 85% of its planted area is aged below 15 years), FFB output growth slowed to 0.2% in 9M19 (from 21.3% in 9M18), due to (i) high base effect, and (ii) drought in early-FY19, which has in turn affected its FFB yield in Kalimantan estates. 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. Based on our estimates, every RM100/tonne change in our average CPO price assumption (using a baseline average CPO price assumption of RM2,400/tonne) will result in a 19% (or RM11.8m) change in our FY19 core net profit forecast.

Downgrade to HOLD; TP: RM1.13. We raise our SOP-derived TP on TSH by 7.6% to RM1.13 (from RM1.05 previously), as we took the opportunity to roll forward our valuation base year to FY20. Our SOP-derived TP of RM1.13 is arrived based on 22.5x FY20 EPS of 2.5 sen, and latest market price of 22.3%-owned Innoprise. However, we downgrade our rating to HOLD (from Buy previously), as we believe better earnings prospects (arising from higher palm product prices) has already been reflected in recent share price run-up (which has risen by 28.2% since early Nov-19).

Source: Hong Leong Investment Bank Research - 2 Dec 2019