THP’s 1QFY13 earnings of MYR3.2m (-75.4% y-o-y) disappointed as  its inorganic  FFB  production  growth was  unable  to  mitigate  the  effect  of sharply  lower  CPO  prices,  a  higher  production  cost  and  surprisingly hefty amortization charges. Amortization costs will continue to inch up in the coming years, further dampening  EPS that was already diluted by new  shares issued  for its  recent  acquisitions.  Maintain SELL,  with a FV of MYR1.35.

- Below  expectations.  TH  Plantations  (THP)’  1QFY13  revenue  fell  to MYR89.5m (-5.9% y-o-y, -9.7% q-o-q) despite a 49.4% and 18.0% y-o-y surge  in  crude  palm  oil  (CPO)  and palm  kernel  (PK) sales  as  realized prices  plunged  by  33.9%  and  42.4%  respectively.  The  cost  of  sales, meanwhile,  grew  by  13.8%  y-o-y  amid  increased  estate  costs  and sharply higher amortization charges.  As a result, its 1Q earnings  shrunk to  MYR3.2m  (-75.4%  y-o-y,  -82.5%  q-o-q),  representing  just  5.3%  and 3.6% of our and consensus full year estimates.  

- High amortization charges to stay.  Amortization expenses surged by 126.6% y-o-y as  FRS3 accounting standards required  THP  to  amortize the  fair  value  of  its  newly-acquired  estates’  net  assets.  Management expects amortization to grow to MYR52.0m (+95.6% y-o-y) in FY13 and increase further  in  the future years as  the trees at  its  acquired estates gradually mature.  While this will be  slightly positive for cash flow, as  it will  reduce  tax  expenses,  dividends  will  be  negatively  affected  as  the company will continue to pay them based on its reported earnings.

- Inorganic production growth.  Production of  fresh fruit bunches  (FFB) in  1Q    grew  by  52.3%  y-o-y  following  major  acquisitions  completed  in end-2012 and early-2013, which boosted THP’s mature area by 76.9%. The  quarter’s  output  reflects  20.1%  of  our  full  year  estimate  of  791k tonnes.   

- Maintain SELL.  We are slashing our FY13 and FY14 earnings forecast by 41.8% and 24.9% respectively after incorporating higher amortization charges,  a  steeper  production  cost  and  a  lower  oil  extraction  rate  of 20.5%  (from  21.0%  earlier).  Our  FV  is  hence  cut  to  MYR1.35,  from MYR1.77, based on 16.0x FY14 P/E.

Source: RHB