TSH’s FY19 CNP* of RM40.5m came below our (82%), but within consensus’ (104%), estimate, from lower-than expected FY19 realized CPO price of RM1,995/MT (vs. our expected RM2,100/MT). FY19 FFB output (+4% YoY) and DPS of 1.0 sen was within expectation. 1QFY20 earnings expected to improve, in-line with higher CPO price (QTD- 1QFY20: +15%) while sturdy FY20 FFB growth is expected as c.4k Ha of palms come into maturity. Reduce FY20E CNP by 16% on wider CPO discount and introduce FY21E CNP of RM93.6m. Maintain OUTPERFORM with lower TP of RM1.60.

Below our, but within consensus’, expectation. 4QFY19 Core Net Profit (CNP) came in at RM6.3m (-22% YoY; -45% YoY), bringing FY19 CNP to RM40.5m (-18% YoY), which is below our estimate at 82%, but within consensus’ at 104%. The negative deviation stemmed from lower-than-expected CPO price of RM1,995/MT (vs. our expected RM2,100/MT). FY19 FFB output of 894k MT (+4% YoY) was within our expectation at 100%. FY19 DPS of 1.0 sen was as expected.

Performance hampered by deferred tax. YoY, despite FFB growth (+4%), FY19 CNP fell (-18%) as topline declined (-7%) on the back of lower average CPO price (-4%). This resulted in EBIT margin compression (-1.9ppt) to 12.3%. QoQ, despite a surge in CPO price (+18%), 4QFY19 CNP plunged (-45%) due to: (i) 3% decline in FFB output, and (ii) spike in taxation (+84%) to RM13.4m (vs. RM7.3m in 3QFY19) mainly due to deferred taxation.

Earnings to improve in 1QFY20. Premised on higher CPO prices (QTD-1QFY20: +15%), we expect to see sequential earnings improvement in 1QFY20. Meanwhile, we understand that c.4k Ha of palms are coming into maturity and despite industry-wide expectations of weaker production in FY20 (arising from dry weather impact, lower fertilizer application and replanting), management expects sturdy FY20 FFB growth of 8-12%.

By imputing a wider discount (+5%) on TSH’s realized CPO price, we reduce FY20E CNP by 16%. Introduce FY21E CNP of RM95.3m on FY21E FFB growth (+4%).

Maintain OUTPERFORM with a lower Target Price of RM1.60 (from RM1.90) based on an unchanged Fwd. PER of 24.4x applied on CY20E EPS of 6.48 sen, reflecting +1.0SD valuation basis, justified by: (i) current CPO price of c.RM2,600/MT (TSH also traded at +1.0SD levels when CPO prices were at c.RM2,700/MT in 2017), and (ii) the likelihood of significant sequential earnings improvement ahead. Valuations of other planters under our coverage are pegged at mean to +1.0SD levels.

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

Source: Kenanga Research - 28 Feb 2020