TSH's 9MFY12 earnings of RM51.3m (-41.3% y-o-y) were substantially poorer than expected as weak output, lacklustre palm oil price and pricier fertilizers weighed on profitability. We believe 4Q will remain weak but expect a meaningful recovery in 2013 as: i) FFB production normalizes after an especially weak 2012, and ii) fertilizer cost will ease when the company locks in its 2013 fertilizer purchases. We are slashing our FY12 and FY13 earnings forecasts but maintain our BUY call in anticipation of a significantly better year ahead.
Disappointing. TSH's 3Q fell to RM260.5m (-4.6% y-o-y) as weaker-than-expected FFB production (-7.2% y-o-y) and softer realized palm oil prices (-8.7% y-o-y) dragged down sales. Consequently, the 3Q core profit of RM15.3m was 59.8% lower y-o-y, with EBITDA margins shrinking 8.5ppt to 14.3%. Earnings also contracted sequentially on weaker prices despite seasonally stronger production. TSH's 9MFY12 profits clocked in at RM51.3m (down 41.3% y-o-y) as weak FFB output, lethargic selling prices and higher fertilizer prices dealt a triple whammy to profits. The company's 9M earnings represented 50.6% and 53.2% of our and consensus' full year estimates respectively.
Less fruitful. 3Q FFB production from TSH's Sabah estates recovered 17.2% q-o-q but remains subpar compared with the stellar output in 2011 when production grew 20.1% y-o-y although 99.5% of its trees have reached peak production age. Its 3Q and 9M Sabah production represented 25.3% and 70.7% of our FY12 forecasts respectively. In contrast, the company's much younger trees in Indonesia produced 203.0k tonnes of FFBs during the past nine months, 5.1% higher than that seen over the same period last year. Expectations were much higher, however, given its Indonesian trees' young age profile (just 13.7% are at their peak) and the 59.4% surge in production last year.
A muted 4Q seen. We expect TSH's 4Q earnings to match 3Q's bottomline, at best. MPOB prices so far this quarter have averaged RM2,266 per tonne (-20.5% q-o-q, -23.2% y-o-y). With its 4Q production growth likely to be flat sequentially, 4Q's profits may well decline q-o-q. However, since fertilizer prices have been declining from the beginning of the year, planters' fertilizer cost should be lower in 2013 compared to that in 2012 when they lock in their contracts at the end of the year. TSH's Indonesian production should also return to a more normalized growth pace, which suggests a brighter 2013 ahead.
Chopping estimates. We trim our FY12 and FY13 earnings forecasts by 34.3% and 16.7% respectively as we have lowered our production expectations. We now expect FFB production to dip by 2.1% in FY12 (previous forecast: +8.1%) before bouncing back by 16.2% next year. Our FV is now lower at RM2.46, based on a 15.0x FY13 PE and RM0.16 per share for its immature rubber estates. Still a BUY.
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