We  lift  our  effective  CPO  price  forecasts  after  removing  part  of  the export tax discount we previously imputed, as the company continues to sell all its CPO locally, with sales discounts to local refiners reduced.We also review THP’s 2014 KPI targets, which seem on the conservative side, in  our  view.  Post-earnings  revision, we  raise  our TP  to MYR1.64 (from MYR1.41), based on an unchanged 16x CY14 P/E.

• FFB production on track.  TH Plantation‟s  YTD-March  FY14 fresh fruit bunches (FFB) production  is up  7.9% y-o-y,  lower than our projection of 10.5% for FY14. However, we believe our projection is achievable as we expect  FFB  production  to  pick  up  pace  in  2H14  in  view  of  the  peak production period. For 2015-2016, we  project  THP‟s FFB production  to grow at a faster 15-25% annually due to rising mature hectarage.
• Partially  removing  export  tax  discount in  CPO  price  assumptions.We raise our CPO price assumptions to MYR2,650/tonne for FY14 (from MYR2,552)  and  MYR2,850/tonne  for  FY16  (from  MYR2,712).  We  had previously  incorporated  an  export  tax  discount  for  THP‟s  CPO  price forecasts  in  view  of  the  export  tax  regime  implemented  in  Malaysia  in Jan 2013 (see Figure 1). We had expected upstream players like THP to start exporting CPO instead of selling it  locally given the large discounts local  refiners  have  been  imposing  on  their  CPO  purchases.  However, THP continued to sell its CPO to local refiners, which is still  at a discount to  MPOB  prices  (Figure  2),  mainly  due  to  the  location  of  its  estates (majority in Sarawak where refineries are still in shortage). Nevertheless, these  discounts  are  expected  to  narrow  going  forward,  as  more refineries  come  onstream  in  Sarawak.  As  such,  we  have  reduced  the discount in our price assumptions to MYR50/tonne from FY14 onwards.   
• KPI  targets  set.  THP  has  set  its  KPI  targets  for  2014,  which  is  to achieve  an  ROE  of  6%  (FY13:  5.47%),  FFB  yield  of  22.4  tonnes/ha(FY13: 23.86t)  and a dividend payout of 50%  (FY13: 51.8%).  Based on our forecasts, an ROE of 6% implies  a net profit of MYR73.6m, which is lower  than  our  projected  MYR88.2m,  likely  due  to  its  lower  CPO  price assumption  (MYR2,600  vs  RHB‟s  MYR2,650/tonne)  and  higher production cost assumption (MYR1,500/tonne vs our MYR1,400-1,450).      
• Raising  fair value.  We raise our FY14-15  earnings forecast by  15-18% and  lift  our  TP  to  MYR1.64  (from  MYR1.41),  based  on  an  unchanged target P/E of 16x CY14.  However, we maintain our SELL call on THP as we believe its  valuations continue to be  prohibitive  at current levels. We believe a better entry point into THP would be in 2015/2016.

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Company Profile
TH Plantations is involved in oil palm plantations in Peninsular Malaysia, Sabah and Sarawak

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Source: RHB