THP’s FFB output in line with trend, Swak to drive long-term growth

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KUCHING: TH Plantations Bhd (THP) is expected to record flattish fresh fruit bunches (FFB) growth in the second half of the financial year 2017 (2HFY17) but analysts say this is in line with the current palm oil industry’s trends.

Aside from that, in the long run, analysts believe that THP’s operations in Sarawak is expected to drive its long-term growth.

In a recent report, the research arm of AmInvestment Bank Bhd (AmInvestment) noted that THP’s FFB production reached its peak in August 2017.

As such, it expected the group’s FFB output to be relatively flattish in 2HFY17 but it also pointed outt that  THP’s production pattern is in line with industry trends.

“Plantation companies have been saying that palm oil production would not be exciting in 2H2017 due to the last leg of El Nino, which took place in 2015,” it highlighted.

For FY17, it expected the group’s FFB production growth to be at 15 per cent as the group had recorded a 16 per cent year-on-year (y-o-y) increase in FFB output for the first eight months of FY18 (8MFY18).

“Looking ahead to FY18F, we forecast that THP’s FFB production would improve by a slower 10 per cent,” it added.

Meanwhile, AmInvestment highlighted that THP’s FFB production is anticipated to be driven by Sarawak.

It explained, “Sarawak is expected to support THP’s long-term profit growth due to its young oil palm trees. Sarawak accounts for almost half of THP’s FFB production. About 59.8 per cent of THP’s planted landbank are in Sarawak, another 24.1 per cent are in Peninsular Malaysia while another 14.5 per cent are in Sabah.

“The balance 1.6 per cent are in Indonesia. Average age of THP’s oil palm trees is eight years in Sarawak compared with 11 years in Peninsular Malaysia and 16 years in Sabah. As at end-FY16, about 62 per cent of the oil palm trees in Sarawak are from four to nine years old while another 19 per cent are between 10 and 19 years old. The balance 19 per cent of the planted areas are below four years old.”

Aside from that, the research team believed that THP’s operating profit margin would improve in 2HFY17 as the group had already applied most of its fertiliser in 9MFY17.

“Due to the wet weather, application of fertiliser is usually minimal in 4QFY17,” it added.

It noted that production cost (ex-depreciation and cost of external FFB) is estimated to be RM1,300/tonne in Malaysia in FY17F. As fertiliser costs are envisaged to be stable in FY17F, the research team believed that production cost per tonne would increase in FY18F as industry players have indicated that fertiliser prices have increased by single-digit percentage.

On its operations in Indonesia, the research team expect the pace of new plantings of oil palm in Indonesia to decline in FY18F.

“As THP’s landbank in Indonesia is on peat soil, the group is unlikely to carry out any new planting in FY18F. Peat soil plantings are viewed unfavourably by THP’s clients such as Wilmar International. Currently, THP has a landbank of 6,000ha in Kalimantan,” it added.

On THP’s degearing efforts, AmInvestment expected THP to continue to sell its non-core assets such as its rubber plantations in Sabah.

“Without accounting for any asset disposal, we estimate THP’s net gearing to be 67.1 per cent as at end-FY18F vs. 73.4 per cent as at end-FY17F,” it projected.

All in, the research house maintained a ‘hold’ call on the stock.