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.

Source: OSK