TDM’s 1Q15 results disappointed, reversing into losses on the back of a 16% drop in FFB production and start-up losses at its Indonesian operations. Maintain NEUTRAL with a lower MYR0.63 TP, implying a 7% downside. While we expect FFB production to improve in the coming months, start-up losses in Indonesia are likely to continue impacting this stock.

• Disappointing results. TDM recorded a core net loss of MYR5.8m in 1Q15, which was significantly below our forecast, mainly due to disappointing FFB production, which fell 16% YoY during the period, vs our projection of +2.7%. This was caused by extremely wet weather and flooding in the East Coast during the monsoon season . Its Indonesian operations also recorded higher-than-expected start-up losses of MYR4.5m in 1Q15.
• TDM reversed into losses in 1Q15, on the back of a 14% YoY drop in revenue. The decline in revenue was due to a 35% decline in contributions from the plantation division, offset by a 23% increase from the healthcare division. CPO prices fell 14% YoY in 1Q15, while FFB production dropped 16%, resulting in EBIT margin falling to neative territory of -37.5%. The healthcare division helped offset this decline, posting an 18% YoY rise in PBT amid a 34% growth in inpatient admissions and a 46% rise in inpatient days, helped by maiden profit contribution from its newly-expanded Kuantan Medical Centre.
• Cutting earnings forecasts. While we expect the next few quarters to be better in terms of FFB production post-monsoon, we have cut our earnings forecasts for FY15-17 by 16-26%, after accounting for higher start-up losses in Indonesia. TDM has seen a 34% MoM improvement in FFB production in April and expects this strength to continue over the next few months. It continues to target a 5% YoY growth for FY15, although we maintain our less optimistic stance of 2.7%.
• Maintain NEUTRAL. We revise our SOP-based TP to MYR0.63 (from MYR0.83), based on an unchanged 16x 2016 target P/E for its plantationdivision and 20x 2016 P/E for its healthcare division. We also highlight TDM’s significant sensitivity to CPO prices, whereby every MYR100/tonne change in CPO prices could affect its earnings by 6-8% per annum. As valuations remain fair at current levels, we maintain our NEUTRAL recommendation on the stock.