Lack of catalyst

THP’s 1Q16 results fell short due to weaker-than-expected FFB output that was affected by the dry weather. However, earnings should improve in the coming quarters on seasonally stronger production and higher CPO price. Therefore, our earnings forecasts are unchanged. Maintain HOLD at an unchanged TP of MYR1.30 based on 1x trailing P/NTA (-1SD of 3- year mean trailing P/NTA) due to the lack of catalyst.

1Q16 results were below

THP’s 1Q16 headline net loss of MYR7m included MYR4.9m fair value loss of its forestry assets and MYR2.8m unrealized forex translation loss from its IDR advances to its Indonesia subsidiary. 1Q16 core net profit of MYR0.6m (1Q15 core net loss was MYR2.4m, -96% QoQ) accounted for 2%/1.4% of our/consensus full-year forecasts. The shortfall was due to lower-than-expected FFB output (+0.8% YoY, -37% QoQ) caused by the dry weather. 1Q16 FFB production accounted for just 16% (vs. historical average of 20%) of our full-year forecast.

Core net profit lifted by lower tax

THP turned marginally profitable in 1Q16 vs. 1Q15 due to higher deferred tax assets recognized in 1Q16. Meanwhile, core pretax loss was 8% lower YoY as its stronger CPO ASP of MYR2,235/t (+3% YoY, +8% QoQ) was partly offset by higher all-in cost of production of MYR2,532/t (+2% YoY, +24% QoQ). Although finance cost dropped 55% YoY (-33% QoQ) as part of it was capitalized after the restructuring of its loans, cost of production per tonne was still higher YoY due to the 9% increase in mature areas and 1st-2nd year estates accounting for 24% of its total mature areas.

Earnings to play catch up in the following quarters

We expect earnings to play catch up in the coming quarters as THP’s production is seasonally stronger in 2H. Our FY16 forecast assumes 7% YoY FFB production growth. The downside to production estimate could be offset by potential upside to CPO ASP. We retain earnings forecasts.

Source: Maybank Research - 24 May 2016