TH Plantations posted a relatively weak 1Q09 numbers with net profit lower by 69.2% year-on-year (y-o-y) to RM8.8 million, and operating margin almost halved to 24.1% from the usual 40%.

"However, we believe that the 1Q09 operating margin compression was a one-off occurrence and earnings are set to bounce back strongly in subsequent quarters. The growth outlook for TH Plantations is bright with the recent acquisitions.  In addition, its sound financial footing enables it to pursue further growth via acquisitions," it said in a research note.  

The research house recommended a buy with target price of RM2 pegged at 10.5 times FY10 earnings.

MIDF Research said TH Plantations' revenue declined marginally by 8.6% y-o-y to RM60 million despite a 47% lower crude palm oil (CPO) average selling price.

It said the topline number was buttressed by an 87% increase in CPO output, owing to the acquisition by THP in December 2008 of two plantation companies, namely Syarikat Sabaco Sdn Bhd  (Sabaco) and Ladang Bukit Belian Sdn Bhd  (LBB). However operating profit declined by 62.4% y-o-y to RM14.5 million due to high average cost of CPO opening stock and amortisation charges," it said.

The research house said as at FYE December 2008, TH Plantations carried in its balance sheet inventories worth RM39.6 million.  

"Since the cost of goods sold during 1Q09 amounted to RM42.6 million, we believe that most, if not all, of the highly priced stocks are already off the book.Hence we expect TH Plantations' operating margin to return to its normal level of 40% in the coming quarters," it said.

MIDF Research said the acquisitions of Sabaco and LBB added almost 8,500ha of mature plantations into TH Plantations' stable, a 60% increase to its existing 14,000ha. The balance 15,000ha of THP existing land and 1,500ha of the newly acquired land comprised of either unplanted or immature plantation, it said.  

The recent corporate exercise saw the percentage of TH Plantations' mature over immature/unplanted plantation land had significantly improved from 48% to 60%, pre and post acquisitions respectively, it said.

It added TH Plantations was a fairly managed company with decent operational and financial statistics.

"TH Plantations does not command the best operational statistics in the country but they are definitely in the upper league with fresh fruit bunch yield of 22.1 tonne per ha vis-à-vis national average of 20.2 tonne/ha. In addition, its low financial gearing provides room for further growth via acquisitions," it said.