th 20080730

Recommendation: BUY
Price: MYR3.44
12-Month Target Price: MYR4.05
Date: July 30, 2008
Market Value - Total: MYR674.6 mln
Analyst: Siti Rudziah Salikin
Summary: TH Plantations (THP) is involved in the cultivation of oil palms and oil palm milling. It has 28,730 hectares of plantation land in Pahang, Johor, Negri Sembilan, Terengganu and Sarawak, and three palm oil mills with a total annual capacity of 419,000 mt.






Results Review & Earnings Outlook
THP’s 2Q08 results were within our expectations. Higher palm oil selling prices and increased production boosted net profit for the quarter to MYR22.9 mln from MYR11.5 mln in 2Q07. 1H08 net profit was MYR51.6 mln, up 2.5x YoY, and accounted for 45.5% of our fullyear forecast.

CPO output for 1H08 rose 45.3% YoY to 33,918 tons, driven substantially by a recovery in palm yields and higher supply of FFB from THP’s own estates and outside purchases. CPO price averaged MYR3,500/ton, based on MPOB’s reference price, versus MYR2,200/ton in 1H07.

We are keeping our projected net profit growth of 85.8% YoY for 2008 to MYR113.5 mln, assuming an average CPO price of MYR3,200/ton. We are looking at a lower CPO price in 2H but expect the lower selling price to be made up by seasonally stronger crop production. Generally, palm oil output in 2H accounts for about 60% of the total production for the full year.

We have not incorporated the net positive impact of the proposed acquisitions of Syarikat Sabako Sdn Bhd and Ladang Bukit Belian Sdn Bhd (via cash and issuance of new shares) into our forecast for 2009. Factoring in profit contributions from the two plantation companies, our projected decline in 2009 EPS (as we assume a lower CPO price of MYR3,000/ton) will be reduced to 2%-3% from 7.8%, presently.

Recommendation & Investment Risks
We maintain our Buy recommendation on the stock with an unchanged 12-month target price of MYR4.05. Although the high palm oil inventory and crude oil price slide are putting downward pressure on the CPO price, we still maintain our view that the downside to the CPO price will be supported by the strong underlying demand and the tight global supplies of other edible oils.

We continue to like THP for its attractive dividend yield. THP has a relatively generous dividend policy of about 50%, which will translate into a dividend per share of 29 sen for 2008 (based on our existing projected net profit) or a yield of 9%. The company has declared an interim dividend of 10 sen. The proposed 1-for-1 bonus issue will also improve the share’s trading liquidity.

The target price is derived using a DCF approach and includes our projected dividend for 2008. Our main assumptions are: (i) that THP’s new plantings of 11,000 ha in Sarawak and Terengganu will be completed by end-2009, followed by the replanting of old trees in Peninsular Malaysia; (ii) a long-term CPO price of MYR2,500/mt; and (iii) a WACC of between 11.5%-11.7%.

Risks to our recommendation and target price include a continued CPO price downtrend, which could be caused by increased global acreage of oilseeds and volatile oil prices.

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