We  visited  THP’s  Pahang  estates  recently  and  found  them  to  be reasonably well-managed, while its peat soil areas in Sarawak are likely to put its management’s expertise  to  the  test.  We  view  the stock’s current  valuations  expensive,  amid  declining  profitability  due  to  rising interest  expenses,  steeper  amortization  charges  and  a  growing  share base. Maintain SELL with its FV at MYR1.35. 
 
- Our  road  trip.  TH  Plantations  (THP)  recently  took  11  fund  managers and  analysts  on  a  217km  ride  from  Kuala  Lumpur  to  Kota  Bahagia  in Pahang  for  a  closer  look  at  its  plantations.  The  Kota  Bahagia  complex, located  in  the  Titiwangsa  mountain  range,  has  7,262  ha  of  planted  oil palm  areas,  on  which  5,727  ha  are  of  mature  trees,  making  up  10.9% and 14.0% of THP’s total planted and mature hectarage respectively.  

- Mechanization  underway.  The  estate  appeared  to  be  organized  and machinery  is  used  for  harvesting  and  transporting  produce  to  increase efficiency.  A  mechanical  cutter,  mechanical  buffaloes  and  PDAs  are used  to  enhance  productivity  too.  However,  we  note  that  the  complex has  yet  to  implement  full  mechanization,  which  is  even  less  common among THP’s operations outside Peninsular Malaysia.   

- Yields  similar  to  peers.  The  annual  yield  from  the  nine-year-old  trees stands at 25 tonnes of fresh fruit bunches (FFB) per ha, similar to most of its peers’, although some companies have achieved yields of 28 to 30 tonnes  per  ha  at  peak  production  age.  THP’s  40-feet-tall,  28-year-old trees still produce a decent average FFB yield of 25 tonnes per ha, but the labour cost involved in harvesting the fruits is almost double that for a normal  tree. While  the  company’s Pahang  estates  are  reasonably  well-run, managing its Sarawak peat areas may prove to be more difficult.

- Maintain  SELL.  The  company’s rising interest  expenses,  steepening amortization charges and issuance of new shares in relation to its recent acquisitions  will  compress  its  FY13  EPS.  However,  against  a  backdrop of weak CPO prices, we expect FY13 EPS to plunge 62.0% y-o-y. THP is  trading  at  steep  38.5x  FY13  and  21.9x  FY14  P/Es.  Maintain  SELL, with our FV at MYR1.35, based on 16.0x FY14 P/E.

Source: RHB