What’s New

• 4Q/FY16 missed expectations

• Strong operating performance dragged by forex translation losses and higher taxation

• Expect FFB volume pick-up to coincide with higher CPO ASPs in FY17

• Cut FY17/18F earnings by 1-2% after imputing full year figures; maintain BUY and RM2.25 TP

Passed the worst. TSH’s revenues and EBIT expanded in FY16 on the back of 18% higher crude palm oil (CPO) prices, despite lower volumes from earlier bouts of dry weather. The bottomline was however hit by forex translation losses and taxation issues. In FY17, we expect internal fresh fruit bunch (FFB) volume and CPO volume expansion of up to 11% and 14% respectively as the adverse weather impact recedes, while higher CPO prices further improves earnings prospects. Maintain BUY.

Price, volume factors are aligned. In FY17, we expect both the 1) rebound in CPO prices, and 2) y-o-y improvement in FFB yields to result in a strong earnings uptick, after two years of lukewarm profitability. As an upstream focused player, TSH is set to be a prime beneficiary of these broader positive trends for the industry. Our average CPO price forecasts are RM3,040/RM3,030 per metric ton (MT) for CY17/18F.

Maturity pipeline is key differentiator. Over 60% of TSH’s planted area is made up of young and immature oil palms, and thus, its mature planted area is projected to rise 33% to c.40k ha by 2018 from an estimated c.30k ha at end-FY16. This will support its growth in own FFB, which we estimate to grow at a CAGR of c.15% over 2016-2018. This organic growth pipeline is a positive given the current environment of slow-to-negligible new planting by the larger groups in the region.

Valuation:

Our DCF-based TP is RM2.25, taking into account our CY17/18F CPO price forecasts of RM3,040/RM3,030 per MT.

Key Risks to Our View:

TSH’s share price is driven by CPO price expectations. Hence, a strong recovery in CPO prices (either data or regulatory-driven) could lift its share price above our fair value, and vice versa. A severe El Nino could also affect TSH’s productivity, cash generation, and ultimately its share price performance.

Source: Alliance Research - 28 Feb 2017