Underperformed. 2Q13 MYR7m net profit (+121% QoQ, -64% YoY) brings 1H13 net profit to MYR10m (-69% YoY), meeting just 18%/21% of our and consensus full year forecasts. THP’s earnings undershot our estimate due to weaker-than-expected FFB production and below market CPO ASP. We reduced FY13 output estimate by 6% and subsequently cut FY13 net profit by 21%. We reiterate our nonconsensus SELL call given its pricey 19.5x FY14 PER valuation. TP is unchanged at MYR1.28 based on 14x FY14 PER.

Higher QoQ, boosted by deferred tax. 2Q13 PBT grew 47% QoQ (- 70% YoY) due to higher FFB output (+12% QoQ, +65% YoY) and CPO ASP (+6% QoQ, -31% YoY). 2Q13 net profit posted higher increase of 121% QoQ (-64% YoY) due to higher deferred tax assets recognized on unabsorbed capital allowances and unutilized tax losses. However, management guided tax expense would normalise in 2H13.

Lackluster 1H13. 1H13 PBT declined 75% YoY even though output increased 59% YoY. THP’s 1H13 cost of production was inflated due to higher financing cost and amortization charges from the newly acquired estates (completed in 4Q12 and 1Q13) despite efforts to improve efficiency. In addition, THP’s 1H13 CPO ASP of MYR2,094/t (-33% YoY) was at a discount to local spot prices due to deterioration in quality of the “older” CPO stocks.

Cutting FY13 forecast. 1H13 FFB production accounted for 40% of our full-year forecast and is below its historical 1H:2H production ratio of 44:56. We have reduced our 2013 FFB output forecast by 6% on fresh guidance from management and cut our FY13 net profit by 21%.

Reiterate non-consensus SELL call given its pricey valuation of 19.5x FY14 PER. Although THP’s expansion plan would provide medium-tolong term earnings visibility, it would have to go through a gestation period (1-2 years) as the estates are still young with relatively higher cost of production per CPO tonne. Our CPO ASP forecasts for 2013/14 remain at MYR2,500/MYR2,600/t. For every MYR100/t change in CPO ASP, 2013/14 net profit would change by MYR9m/10m (18%/13%).

Source: Maybank Research - 21 Aug 2013