TH Plantations’ 1Q15 earnings were below expectations, due to weakerthan- expected FFB production which fell 20% YoY from the delayed impact of the dry weather in 1H14 and the wet monsoon in 1Q15. We trim our TP to MYR1.00 from MYR1.05, implying a 35% downside, after cutting our earnings estimate to impute the lower FFB production. Maintain SELL, as its valuations remain prohibitive.

Below estimates. TH Plantations’ 1Q15 net profit was below our and consensus expectations, at 13-16% of FY14 forecasts. The main discrepancy was the lower-than-expected FFB production growth of -20% YoY in 1Q15 (vs management’s target of +15-20% and our projected +12% for FY15), due to the delayed impact of Sarawak’s dry weather experienced in 1H14 and the wet monsoon in 1Q15.

Core net profit rose 17% YoY despite a 34% YoY drop in revenue – due to the positive taxes it recorded in 1Q15, as it recognised MYR6.6m worth of deferred tax assets as well as the positive MI, due to losses incurred at its young areas. The fall in topline was due to the 20% YoY drop in FFB production and a 14% YoY decline in CPO prices. FFB yields declined by 1.3 tonnes/ha YoY (-29%) due to young areas coming into maturity, which bear lower yields. At present, approximately 33% of its matured area is in the first and second year of maturity.

FFB growth target maintained. TH Plantations continues to maintain its FFB production growth target of 15-20% for FY15, expecting production to build up in subsequent quarters. We are less optimistic and have cut our FFB growth projections to +5% for FY15 (from +12%) and +14-17% (from +15-18%) for FY16-17. Overall, we cut our FY15-17 earnings forecasts by 6-9%.

Maintain SELL. We trim our TP to MYR1.00 (from MYR1.05), based on an unchanged 16x CY16 target P/E. Despite the company’s decent expected annual FFB production growth of 10-15% pa, we believe it may not be enough to offset the impact of lower CPO prices given its significant sensitivity to CPO prices. This is because every MYR100/tonne decrease in CPO prices could hurt its earnings by 8-10% annually. We maintain our SELL recommendation, as we believe valuations remain prohibitive at current levels.

Source: RHB Research - 28 May 2015