TH Plantations - Share overhang discounted

-  We upgrade TH Plantations (THP) from HOLD to BUY with a higher fair value of RM2.20/share versus RM2.12/share previously. We have tweaked the group’s FY13F earnings forecast upwards by 3% to adjust for a lower effective tax rate.  

-  We believe that the 13% fall in THP’s share price in the past six months has reflected the group’s poor quarterly earnings and expensive landbank acquisitions. 

-  Additionally, we reckon that the RM535.6mil acquisition of TH Ladang (Sabah and Sarawak) Sdn Bhd may not be as dilutive as previously thought. This is due to the effect of THP’s low profit base in FY12F, where earnings are expected to fall 43%. 

-  THP’s net profit growth in FY13F is envisaged to be underpinned by a recovery in FFB yield and contribution from TH Ladang. 

-  However, FY13F EPS is anticipated to expand by a smaller 4% due to the 43% increase in share base. Also, the surge in FFB production resulting from the acquisition of TH Ladang may not translate into higher margins immediately. 

-  This is because THP does not have any palm oil mill in Sarawak yet. Hence, the group would have to rely on third party millers in the short-term.

-  THP is currently in the process of building a 60 tonne-per hour mill in Sarawak, which would only be completed by 2QFY13 or 3QFY13. TH Ladang recorded FFB production of 146,951 tonnes in FY11, which would have been about 29% of THP’s total output. 

-  The positive aspect from the acquisitions of TH Ladang and Bumi Suria Ventures is that they would help improve the age profile of THP’s oil palm trees. The oil palm trees of the acquired companies range from one to 14 years old. 

-  In comparison, the average age of THP’s oil palm trees was 14-15 years old as at end-FY11. About 25% of the group’s oil palm trees were aged 20 years and above as at end-FY11. 

-  We forecast THP’s balance sheet to swing from net cash as at end-FY11 to a net gearing position of 28% as at endFY13F. 

-  This is mainly due to the RM254.6mil acquisition of 6,513ha of land in Sarawak from a group of individuals and Weida (M) Bhd. The acquisition is expected to be completed in 1QFY13.    

Source: AmeSecurities