1Q19 CNP* of RM13.9m (+104% YoY; +80% QoQ) is deemed within our forecast at 30%, but below consensus estimate at 21%, as we expect earnings to soften in coming quarters on falling CPO prices, normalisation of tax rate and higher overheads. FFB output of 205k MT is also within our full year projection of 964k MT at 21%. No dividend was declared during the quarter, as expected. No changes in FY19-20E CNP of RM45.7-66.3m. Maintain MP with a lower TP of RM0.900.

Within our estimate, but missed street’s. TSH’s 1Q19 Core Net Profit (CNP*) of RM13.9m (+104% YoY; +80% QoQ) is deemed within our forecast at 30%, but below the consensus estimate at 21%. We expect earnings to soften in coming quarters against the backdrop of falling CPO prices, normalisation of tax rate and higher maintenance costs as 4k Ha planted areas come into maturity. FFB output of 205k MT is also within our full-year projection of 964k MT at 21% — production is usually weakest in the first quarter. No dividend was declared during the quarter, as expected.

Decent results. YoY, 1Q19 CNP more than doubled to RM13.9m as FFB output jumped 18%, masking the impact of a 17% decline in the average CPO price. In addition, the effective tax rate (ETR) was significantly lower at 17% vs. 34% in 1Q18 due to over-provision in prior years. QoQ, 1Q19 CNP also surged by a commendable 80% as the average CPO price improved 7% while FFB output was relatively flat (-1%).

Expect earnings to soften in coming quarters. We expect TSH’s earnings to soften marginally in coming quarters as CPO prices remain under pressure. Additionally, we expect EBIT margins to erode from 11% in 1Q19 to an average of 9% in FY19 as more planted areas (c.4k Ha) come into maturity, resulting in higher overhead/maintenance costs.

No changes in FY19-20E CNP of RM45.7-66.3m with earnings coming within our expectation. Note that we had already slashed earnings by 48-28% in our sector downgrade report dated 21 May 2019.

Maintain MARKET PERFORM with a lower Target Price of RM0.900

(from RM1.00) based on CY20E PBV of 0.76x (from 0.85x), reflecting - 2.0SD valuation basis (previously -1.5SD). The target price implies 18.8x CY20E PER, a 25% discount to large-cap planters’ average of 25.0x, which we believe is fair for a mid-cap planter. TSH’s near-term outlook appears neutral as its FFB growth prospects of 12% for FY19 is negated by depressed CPO prices.

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

Source: Kenanga Research - 28 May 2019