Period  3Q13/9M13

Actual vs. Expectations  TSH’s 9M13 core net profit of RM87m is way better than expected as it makes up 97% of consensus forecast (RM90m) and 83% of our forecast (RM104m). We excluded the gain from the disposal of Pontian stake (RM85m) and forex loss (RM43m) in calculating the core net profit estimate.

 We may have underestimated TSH’s effort to increase its efficiency in managing its cost during the tough time of low CPO prices. Note that the 3Q13 cost of sales actually declined 25% YoY to RM148m. This could be due to the good timing in fertilizer purchase when lower prices were obtained coupled with the effort to increase its FFB harvesting efficiency.

Dividends  As expected, no dividend was announced.

Key Results Highlights  YoY, 9M13 core net profit jumped 52% to RM87m due to improved PBT from its Sabah refineries with Wilmar (+155% to RM20m) and superior FFB growth of 34% to 379,673 mt. Both of these factors were enough to counter the adverse impact of lower CPO prices, which declined 23% to RM2202/mt.

 QoQ, 3Q13 core net profit surged 75% to RM41m due to better CPO prices (+2% to RM2239/mt), seasonally higher FFB production (+6% to 128,943 mt) and lower cost of sales (-11% to RM148m).

Outlook  The strong earnings improvement up-cycle may have just started for TSH. We expect its 4Q13 results to be even better than 3Q13 due to better CPO prices and seasonally stronger FFB production.

Change to Forecasts  FY13E earning is increased by 11% to RM115m while FY14E earning is raised by 7% to RM188m. We have assumed lower fertilizer cost and general cost.

Rating   Maintain OUTPERFORM

 Despite the recent jump in share price by about 15%, TSH is still undervalued due to expected 63% core earnings growth in FY14E to RM188m.

Valuation  We raised our TP by 24% to RM3.18 (previously: RM2.56) after applying higher Fwd. PER of 15.0x (previously 12.9x) on higher CY14E EPS of 21.2 sen (previously 19.9 sen). Our new valuation of 15.0x Fwd. PER has been upgraded to +0.5SD over 5-year Fwd. PER (from Avg. 5-year) as we reckon TSH should trade at a premium against other planters (which we value at Avg Fwd. PER) due to its good cost management and high FFB growth.

Risks to Our Call  Lower than expected CPO prices and FFB growth. 

Source: Kenanga