Highlights

We are still keeping to our FFB output growth projection of 20.3% for TSH in FY14, as: (1) FFB yield at its Sabah estates have already resumed on the uptrend in recent months (which is in line with the state’s overall FFB output trend); and (2) its oil palm estates in Indonesia is still in fast growing phase, thanks to the young tree profile (average age of approximately 5.5-6 years, with additional 3,000 ha of planted landbank in Indonesia maturing this year).

We believe production cost will likely decline further from FY13’s level, underpinned mainly by higher FFB output contribution from Indonesia and lower fertilizer cost (as FY14 fertilizer requirement has already been locked in since end- FY13, whereby price was still at the lower end). We also understand that the minimum wage hike in Indonesia will have minimal impact on TSH’s overall production cost as most of its labors in Indonesia are already paid above the new minimum wage.

Management hinted that it would be able to at least maintain FY13’s new planting of 3,100 ha (if not higher) this year, given the disposal of its stake in Pontian United and private placements have already brought down its net gearing to a relatively comfortable level of 0.68x (as at end 1Q14). The large landbank reserves and continued planting efforts will continue to drive TSH’s FFB output growth over the longer term.

Catalysts

• Higher-than-expected FFB output growth;
• CPO prices strengthen further; and
• Better-than-expected performance at Ekowood.

Forecasts

Maintained. Ceteris paribus, every RM100 change in our CPO price assumption will result in ~6% change in TSH’s 2014 and 2015 projected net profit

Risks

Downside

• Weaker-than-expected FFB output;
• Escalating labour cost, which will in turn result in higher production cost; and
• Weaker-than-expected recovery in edible oil demand and prices.

Rating

HOLD

Positives - (1) Strong FFB growth; (2) Stable cash flow from alternative power plant; and (3) Favourable long term outlook of the oil palm business.

Negative – (1) Rich valuations; and (2) Relatively high net gearing (although declining)

Valuation

We are raising our SOP-derived TP on the stock by 6% to RM3.36 as we updated our valuation parameters. Although we like TSH for its young tree profile (which in turn leads to high FFB output growth), we believe further near-term upside is capped by its rich valuations.

Source: Hong Leong Investment Bank Research - 8 Jul 2014