FY18 CNP* of RM49.8m came within our forecast at 102% but was 11% shy of consensus, likely due to the lower-than- expected CPO price. YoY, FY18 CNP halved as a 21% FFB growth failed to offset CPO price drop of 23%. QoQ, 4Q18 CNP halved on both lower CPO price (-13%) and FFB (-18%). A 1.0 sen dividend was proposed, within expectation. Fine- tune FY19E CNP by -1% to RM87.9m and introduce FY20E CNP of RM92.6m. Maintain OP with TP of RM1.30.

Within our estimate, but missed street’s expectation. TSH’s FY18 core net profit (CNP*) of RM49.8m (-51% YoY) came within our forecast with a 2% positive deviation but fell short of consensus estimate by 11%, likely due to the lower-than-expected CPO price. FFB output of 858k MT also met our full-year projection of 874k MT at 98%. A first and final dividend of 1.0 sen was proposed, in line with our 0.9 sen forecast.

Dragged by weaker CPO price. YoY, despite FFB growth of 21%, FY18 CNP halved as CPO prices declined 23% to RM2,086/MT. In addition, the effective tax rate (ETR) was significantly higher at 37% (vs. 25% in FY17) due to under-provision in respect of prior year’s deferred income tax and higher non-deductible expenses. However, these were cushioned by a 4.6x increase in Others segment’s profit of RM29.7m on the back of higher sales of cocoa products. QoQ, 4Q18 CNP also halved on a double whammy of lower FFB output (-18%) and weaker CPO price (-13% to RM1,780/MT). On a brighter note, the quarter saw minimal tax (ETR: 0.5% vs. 46% in 3Q18) mainly due to the recognition of the deferred tax asset.

Expect recovery in FY19. We expect TSH’s earnings to recover in FY19 on the back of its FFB growth prospects of +12% as well as a reversal in CPO price from an exceptionally low base of RM2,086/MT in FY18. Management expects CPO price to average RM2,400/MT in 2019, consistent with our current forecast. The improvement is likely to be driven by biodiesel initiatives in both Malaysia and Indonesia.

Fine-tune FY19E CNP by -1% to RM87.9m due to housekeeping reasons, and introduce FY20E CNP of RM92.6m (+5%), backed by FFB growth prospects of 5%.

Maintain OUTPERFORM with unchanged TP of RM1.30 based on an unchanged Fwd. PER of 20.2x applied to FY19E EPS of 6.37 sen. The Fwd. PER reflects -1.5SD valuation basis, compared with other planters under our coverage, which are generally pegged at -1.5 SD to -2.5 SD levels, justified by its above-average production outlook of +12% (vs. industry average of +5%). For investors who like to capitalise on a recovery in CPO prices, we recommend pure upstream planters like TSH given their higher earnings sensitivity to CPO prices. Currently, TSH is the only pure upstream planter under our coverage that is still profitable at a pretax profit level.

Risks to our call include sharp falls in CPO prices and a precipitous rise in labour/fertiliser/transportation costs.

Source: Kenanga Research - 28 Feb 2019