THPLANT ... Aug10

S & P Results Review & Earnings Outlook

• THP’s 2Q10 net profit dropped 57.2% QoQ. Higher production costs (due to increased manuring activities in 2Q), a drop in sales volume (as production fell due to seasonal factors), lower management fees and a higher tax rate contributed to the profit decline.

• YTD net profit of MYR25.4 mln is up 37.9% YoY, driven by higher palm oil prices and nonrecurring charge for fair value adjustment of ESOS made in 2Q09. This accounts for 33.7% of our full-year forecast, but we view the results to be within our expectations.

• We project higher earnings in 2H as production is expected to pick up due to seasonal factors and improving yields. Nonetheless, FFB production for the full year is likely to decline by about 5% due to the weak production to date. We expect production growth to resume in 2011, driven by its young palms. THP has 36,444 ha of planted oil palms, as at end-2009, of which 33.7% are still immature.

• We expect palm oil prices to remain firm, trading at between MYR2,400/ton and MYR2,600/ton in 2H10 (vs. an average of MYR2,549/ton in 1H and MYR2,260/ton in 2009) in view of the still good demand for palm oil and the current low stock level. The development of La Nina, which brings heavy rainfall, would be a bullish factor for palm oil prices should it prolong until end 2010/early 2011.

Recommendation & Investment Risks
• We maintain our Buy call with an unchanged 12-month target price of MYR1.80.

• THP’s above-average operating margins, high ROEs and good dividend yield will support share price outperformance, in our opinion. Based on THP’s dividend policy of distributing 50% of its net profit, we project a gross DPS of at least 10 sen for 2010 (yield of 6.5%).

• Our target price is based on a PER of 10x projected earnings for 2011 and includes our projected dividend. The assigned multiple is equivalent to the stock’s one-year average forward PER.

• Risks to our recommendation and target price include palm oil price volatility, which could be caused by: (i) stronger-than-expected palm oil and soybean oil production due to good weather; (ii) slower imports of palm oil from the world’s largest vegetable oil buyers, China and India, given the high imported vegetable oil stocks, currently; and (iii) crude oil price movements.