TSH’s 1Q20 core net profit of RM23.7m (vs. core net profits of RM2.4m in 4Q19 and RM2.1m SPLY) accounted for 53.6% of our full-year estimate. We consider the results broadly within our expectation, as we expect weaker performance in subsequent quarters in anticipation of lower palm product prices. We tweaked our FY20-21 core net profit forecast slightly higher (by 1.4% and 1.1%), as we recalibrated our earnings model following the recent release of FY19 annual report. We maintain our HOLD rating, with an unchanged SOP-derived TP of RM0.87.

Broadly within our expectation. 1Q20 core net profit of RM23.7m (vs. core net profits of RM2.4m in 4Q19 and RM2.1m SPLY) accounted for 53.6% of our full-year estimate. We consider the results broadly within our expectation, as we expect weaker performance in subsequent quarters in anticipation of lower palm product prices.

Exceptional items (EIs). During the quarter, we adjusted for 21.4m worth of EIs from TSH’s reported profit, and these include (i) RM26.5m unrealised forex loss, (ii) RM4.4m fair value gain on derivatives, and (iii) RM0.4m writeback of impairment.

QoQ. Core net profit surged by 8.8x to RM23.7m in 1Q20 (from RM2.4m in 4Q19), as lower FFB output (-13.7%) was more than mitigated by higher palm product prices and improved contribution from JV, alongside a low base effect.

YoY. Core net profit surged by 10x to RM23.7m (from RM2.1m in 1Q19), as lower contribution from cocoa product segment and lower JV contribution were more than compensated by a sharp recovery in palm product prices, alongside a low base effect.

FFB production. FFB output grew only 1.6% YoY to 207.7k tonnes in 1Q20, 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 tweaked our FY20-21 core net profit forecast slightly higher (by 1.4% and 1.1%), as we recalibrated our earnings model following the recent release of FY19 annual report. In our forecast, we are assuming (i) average CPO price of RM2,350/tonne for FY20 and RM2,400/tonne in FY21-22, and (ii) FFB output growth of 0.5% and 5.8% in FY20-21. Based on our estimates, every RM100/tonne change in CPO price assumption will change our FY20-21 core net profit forecasts by RM10- 11m.

Maintain HOLD; TP: RM0.87. We maintain our HOLD rating, with an unchanged SOP-derived TP of RM0.87 (see Figure #1), as we recalibrated our earnings model and updated the latest share price of 22.1%-owned listed associate (Innoprise).

Source: Hong Leong Investment Bank Research - 28 May 2020