TSH’s FY19 core net profit of RM16.5m (-66.9%) came in below expectations, accounting for only 42.2-49% of consensus and our forecast. Lower-than expected realised CPO price of RM1,995/tonne (vs. our projected average CPO price of RM2,100/tonne) and higher-than-expected effective tax rate were the key culprits to the earnings shortfall. We lower our FY20 -21 core net profit forecast by 8.4% and 1.6%, largely to account for higher CPO production cost and effective tax rate assumptions. We maintain our HOLD rating, with a lower SOP-derived TP of RM1.25 following the downward revision in our core net profit forecast and update on latest share price of 22.3%-owned Innoprise.

Missed expectations. 4Q19 core net profit of RM2.4m (QoQ: -53.1%; YoY: >100%) took FY19 core net profit to RM16.5m (-66.9%). The results came in below expectations, accounting for only 42.2-49% of consensus and our forecast. Lower than-expected realised CPO price of RM1,995/tonne (vs. our projected average CPO price of RM2,100/tonne) and higher-than-expected effective tax rate were the key culprits to the earnings shortfall.

Exceptional items (EIs). During the quarter, we adjusted for RM16m worth of EIs from TSH’s reported net profit. These are largely related to (i) RM6.2m fair value loss on derivatives, (ii) RM18.3m unrealised forex gains, (iii) RM3.8m write back of impairment on receivables, (iv) RM0.5m PPE disposal gain, and (v) RM0.5m PPE, inventories written off.

Dividend. Proposed final DPS of 1 sen for FY19 (similar to FY18), pending shareholders’ approval in the forthcoming AGM.

QoQ. Despite an 18.1% increase in average CPO price realised (to RM2,250/tonne), 4Q19 core net profit fell 53.1% to RM2.4m, due mainly to (i) lower FFB output, (ii) lower contribution from other segment (which relates to cocoa sub-segment, we believe), (iii) higher CPO production cost, and (iv) losses incurred at JV entity.

YoY. 4Q19 performance turned around with a core net profit of RM2.4m (from a core net loss of RM5.1m in 4Q18), due mainly to higher FFB output and higher average CPO price realised (+26.4%), which more than mitigated higher finance costs, weaker contribution from other segment, and losses at JV entity.

YTD. FY19 core net profit slipped 66.9% to RM16.5m as higher FFB output (+4.2%), better performance at cocoa sub-segment and improved JV earnings were more than negated by (i) lower palm product prices and higher CPO production cost (we believe), and (ii) higher finance cost.

FFB production. FFB output grew 4.2% to 894k tonnes in FY19, as lower FFB production in Sabah operations (due to lagged impact from dry season experienced in early 2019) was more than mitigated by FFB production growth at its Indonesia operations (thanks to its young age profile).

Forecast. We lower our FY20-21 core net profit forecast by 8.4% and 1.6%, largely to account for higher CPO production cost and effective tax rate assumptions.

Maintain HOLD; TP: RM1.25. We maintain our HOLD rating, with a lower SOP derived TP of RM1.25 (see Figure #1) following the downward revision in our core net profit forecast and update on latest share price of 22.3%-owned Innoprise.

Source: Hong Leong Investment Bank Research - 28 Feb 2020