th plantations bhd. 2014/2015 financial analysis

TH Plantations Bhd. 1

TH Plantations Bhd.Financial Analysis Report (2014/2015)

A. HARIS AWANG MBA2016-04-1001 MBA 6023 Corporate Finance

Submitted to: Tze San Ong, PhD

Associate ProfessorDepartment of Accounting and Finance Faculty of Economics and Management

Universiti Putra Malaysia10th Dec, 2016

A. HARIS AWANG(MBA2016-04-1001)

ASIA METROPOLITAN UNIVERSITY

ASSIGNMENT

TH Plantations Bhd. Financial Analysis Report (2014/2015) A. HARIS AWANG

Table of Contents

INTRODUCTION...........................................................................................................................1

ANALYSIS......................................................................................................................................1

Performance.................................................................................................................................1

Key Financial Ratios....................................................................................................................3

Strengths & Weaknesses..............................................................................................................7

Recommendations........................................................................................................................8

CONCLUSION................................................................................................................................9

ACKNOWLEDGEMENT.............................................................................................................10

REFERENCES..............................................................................................................................11

APPENDICES...............................................................................................................................12

TH Plantations Bhd. i

INTRODUCTION

TH Plantations Bhd. (THP), a subsidiary of Lembaga Tabung Haji (TH) mainly produces Fresh

Fruit Bunches (FFB), Palm Kernel (PK) and Crude Palm Oil (CPO) for the consumption of the

Malaysian market. Incorporated in 1972 as Perbadanan Ladang-Ladang Tabung Haji Sdn. Bhd.,

its first estate was Ladang Sungai Mengah, measuring 4,054 hectares. To date, THP has

expanded its land bank close to 105,000 hectares. THP currently operates 36 oil palm estates

throughout Malaysia as well as 4 rubber plantations in Sabah. Its recent acquisition is 10,000

hectares of land in Kalimantan Timur, Indonesia. THP also operates 7 palm oil mills with a total

milling capacity of 250 metric tons per hour.

THP has been publicly listed on the Main Board of Bursa Malaysia since 2006. The company

currently owns plantations and mills in Johor, Pahang, Negeri Sembilan, Terengganu, Sabah and

Sarawak as well as Kalimantan, Indonesia.

ANALYSIS

PerformanceThe two-year trend analysis of the company’s performance is summarized as follows:


Trend analysis of performance. All figures extracted from TH Plantations Annual report (Appendices 2 and 3).

The table is further summarized into a chart as below:


Total assets has been reduced drastically from 2014 to 2015 by 41.5%. This is mainly

contributed by the reduction on total debt by 74.3% between the two years. Hence, a 5.9%

increase of total equity from RM1,035,477,000 in 2014 to RM1,096,440,000 in 2015 has no

offsetting impact on the reduction of total assets.

Cash has also been reduced significantly by 80.1% from RM359,950,000 in 2014 to

RM71,753,000 in 2015 as there’s a huge loan repayment of RM1 billion in 2015 as reported in

the Statements of Cash Flows (Appendix 1).

The net profit has increased by 38.3% from RM56,887,000 in 2014 to RM78,687,000 in 2015.

Despite of the reduction in average crude palm oil (CPO) price by 9.6%, the net profit has

increased due to a 24.0% stronger sales volume.

At the Bursa, share price has reduced from RM1.7012 at 31st Dec, 2014 to RM1.1600 at 31st Dec,

2015, a drop of 31.8%. However, earnings per share (EPS) has increased by 28.5% from 5.47 sen

to 7.03 sen. Despite of the lower share price in 2015, the EPS indicates that 2015 has been more

profitable. Another reason for a higher EPS is that the dividend paid out in 2015 is 0 compared to

2 sen per share in 2014.

Based on the EPS formula calculated as:


Source: Bursa Malaysia, 2016.

Key Financial RatiosThe key financial ratios can be expressed as a set of irrefutable measures that can be compared to

industry averages as well as other similar companies’ ratios in the same industry.

These financial ratios can be used by the managers, company creditors, and current and potential

shareholders. Moreover, these financial ratios are also used by security analysts to analyze the

strengths and weaknesses of the company.

There are five categories under which ratios are measured. In this report, two ratios will be

chosen and explained under each category. In the context of this report, ratios higher than 1 are

expressed in decimals while ratios lower than 1 are expressed in percentages. Each ratio is

broken down into three parts – a brief description, the formula and the importance or

implications it has on the company.

The key financial ratios are summarized as in the following table:


Source: Industry average for TH Plantations Bhd. (http://www.investing.com/equities/th-plantations-bhd-ratios)

1. Short-term solvency or liquidity

Current Ratio is a measure of a company's ability to pay its short-term and long-term liabilities.

It is calculated by gauging how much current assets it has with respect to its liabilities.

Current Ratio = Current Assets / Current Liabilities

The current ratios are 1.60 in 2014 and 0.58 in 2015 lower than the industry average of 2.74

which means the company should have at least current assets of 2.74 times its current liabilities

to be on par with the industry average. A short-term creditor may not find this favorable for the

company to secure loan as its current assets are not enough to even cover for its current

liabilities.

Quick Ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a

company’s ability to meet its short-term obligations with its most liquid assets. Therefore, the

ratio excludes inventories from current assets.


Quick ratio = (current assets – inventories) / current liabilities

The quick ratios are about the same as current ratios for 2014 and 2015. This is due to the

relatively low inventories for both years.

2. Long-term solvency of financial leverage

Total Debt Ratio compares a company's total debt (liabilities) to its total assets, which is used as

to the amount of leverage being used by a company. A low percentage means that the company

is less dependent on leverage such as money borrowed. The lower percentage means less

leverage used by the company and a stronger equity position. Generally, a higher ratio indicates

more risk the company is taking.

Total Debt Ratio = (Total Assets – Total Equity)/Total Assets = Total Liabilities/Total Assets

For TH Plantations, the ratios of 59.1% and 26.0% for 2014 and 2015 respectively are much

higher than the industry average of 9.5% which clearly indicate that the company is taking a

higher risk by leveraging on borrowings and has weaker equity position.

Debt-Equity Ratio compares a company's total liabilities to its total equity. It is a measure of

how much suppliers, lenders or creditors have committed to the company versus what the

shareholders have committed. Similar to total debt ratio, a lower percentage means that a

company is using less leverage and has a stronger equity position.

Debt-Equity Ratio = Total Debt/Total Equity

Comparing the results of 1.44 for 2014 and 0.35 for 2015 with the industry average of 0.20, it

can be generalized that TH Plantations, in 2014 relied on borrowings as a leverage and had

weaker equity position compared to 2015. However, the debt-equity ratio has improved closer to

the industry average in 2015 mainly due to the drastic reduction in its liabilities.

3. Asset utilization or turnover

Inventory turnover is a measure for evaluating management’s efficiency at managing company’s

inventory and generating sales from it. Generally, a higher inventory turnover ratio is preferred,


as it indicates higher sales generated for a given amount of inventory. Alternately, maintaining

less inventory for a given amount of sales will have the same effect on improving the ratio.

Inventory Turnover = Cost of Goods Sold/Inventory

The company has much lower ratios for both years at 0.11 for 2014 and 0.94 for 2015 compared

to the industry average of 7.17. This means that the sales generated by the company is relatively

low for a given inventory.

Total Asset Turnover is the ratio of the company’s sales generated relative to its assets. It can

also be used to indicate the company’s efficiency in deploying its assets in generating sales or

revenue.

Total Asset Turnover = Sales/Total Assets

The industry average of 1.10 indicates that the generated sales should be at least 1.10 times the

company’s total assets where TH plantations falls short of fulfilling the standard. In 2014, its

ratio is only 0.04 times its total assets while in 2015 it is only 0.08 times, a slight improvement

but way too far from the standard.

4. Profitability

Profit margin measures how much out of every ringgit of sales a company actually keeps in

earnings. For example, a 20% profit margin means the company has a net income of RM0.20 for

each ringgit of total revenue earned.

Profit Margin = Net Income/Sales

The profit margins for the company are 60.2% and 67.2% for 2014 and 2015 respectively, way

above the industry average of 16.3%. On the other hand, looking at the Group’s level, the profit

margins are 9.88% and 13.65% for 2014 and 2015 respectively which, despite lower, are not far

from the industry average.


Return on Equity (ROE) is the returned of net income as a percentage of shareholders equity. It

measures the company’s profitability by showing the profit the company generates with the

money invested by shareholders.

Return on Equity (ROE) = Net income/Total Equity

The company’s ROE for both years at 5.5% for 2014 and 7.2% for 2015 are low compared to the

industry average of 30.0%. This is not a good return of shareholders’ money as far as investment

is concerned.

5. Market Value

Price-Earnings Ratio also known as P/E Ratio is the ratio for valuing a company that measures

its current share price relative to its per-share earnings. Companies that are losing money do not

have a P/E ratio.

Price-Earnings Ratio = Price per Share/ Earnings per Share

Compared to the industry average of 24.90, the P/E ratios for the company are 31.10 for 2014

and 16.50 for 2015. Generally, a high P/E ratio means that investors are anticipating higher

growth in the future where it is evident from the 2014 result. However, in 2015, the P/E ratio

decreases to 16.10 which means an investor is willing to pay RM16.10 for RM1 of 2015 earnings

as compared to RM30.10 for RM1 of 2014 earnings.

Market-to-Book Ratio measures the market value of a company relative to its book or

accounting value.

Market-to-Book Ratio = Market Value per Share/Book Value per Share

The company’s market-to-book ratios at 0.93 and 0.63 for 2014 and 2015 respectively are

significantly lower than the industry average of 7.94. The low ratios reflect low confidence that

investors place in the company’s ability to continue to outperform its competitors.

Strengths & WeaknessesThe major financial and non-financial strengths and weaknesses are summarized as follows:


Major financial strengths:

An increase in shareholders’ funds from RM1.21 billion in 2014 to RM1.27 billion in 2015

with total assets of RM3.46 billion for sustainable growth.

An increase in earnings per share (EPS) by 28% from 5.47 sen in 2014 to 7.03 sen.

A weaker ringgit against US dollar opens up opportunities for export market.

Major financial weaknesses:

Persistently weak and unfavorably fluctuating commodity prices affecting revenue mainly

contributed by lower average prices realized for CPO and Palm Kernel (PK) of RM2,081 per MT

& RM1,545 per MT respectively. (2014: CPO of RM2,277 per MT & PK of RM1,651 per MT).

Weakened Brent crude oil price averaging at US$46 per barrel in 2015, and weaker world

vegetable oil prices, especially soybean and rapeseed oil have negatively impacted the demand

for palm oil.

Low ratio of optimum yielding to non-yielding land banks of 26-74 instead of the industry

standard of 70-30.

Major non-financial strengths:

Company’s programs in enhancing productivity and efficiency throughout its operations.

Long-term fundamentals of the palm oil sector remain attractive. As the world’s population

grows, the demand for food will increase and palm oil will continue to be major source of oils.

Corporate Responsibility programs - to preserve and protect and improve the employees, the

community, shareholders and the environment.

Major non-financial weaknesses.

Adverse weather patterns that have had considerable impact on production (e.g. El Nino).

Tough operating conditions, and global macroeconomic uncertainties.

Global campaign stereotyping oil palm industry for deforestation.

RecommendationsIn view of the current circumstances, several recommendations for improvement are provided as

follows:


1. Currently, TH Plantations business is only limited to the domestic market. To mitigate the

adverse impact of currency exchange on the revenue and profitability, the weaker ringgit can be

leveraged by expanding the company’s business into foreign markets.

2. For short-term growth, the low ratio of optimum yielding to non-yielding land banks of 26-

74 can be improved by strategic partnership or through acquisition or lease of existing

plantations.

3. In combating the slanderous campaign by certain parties against the oil palm industry,

governmental support is a necessity. Through this, the industry can keep on campaigning and

educating the world of the benefits of palm oil while protecting the environment.

4. The environmental and social criteria developed by The Roundtable for Sustainable Palm Oil

(RSPO) must be strictly complied in order to produce Certified Sustainable Palm Oil (CSPO).

When properly applied, these criteria can help to minimize the negative impact of palm oil

cultivation on the environment and communities in palm oil-producing regions.


CONCLUSION

Summary of Judgment

Based on the summarized findings of key financial ratios as in the table above, for a short-term

gain, it is not recommended for an investor to invest into TH Plantations Bhd.

However, for investors with bigger resources and the ability to hold for long-term, investing into

TH Plantations may be a good option based on the following reasons:

1. The long-term outlook for the industry is expected to be positive, driven by demand that

outweighs supply. As the world’s population grows, the demand for food will increase and palm

oil will continue to be major source of oils and fats.

2. Palm oil is the world’s highest yielding and least expensive vegetable oil. It accounts for one-

third of world’s vegetable oil production. The dominance of palm oil may be explained by the

yield of the oil palm crop which is over four times that of other oil crops, as well as its low price

and versatility as an ingredient in many processed goods (Vijay et al., 2016).

3. TH Plantations Bhd.’s management is very optimistic of the future improved level of

production. By 2018 the company’s plantation age profile would have sufficiently improved to

levels that are more ideal in generating more optimal yields and revenues with better cost

efficiency.


ACKNOWLEDGEMENT

My special thanks and gratitude go my Corporate Finance lecturer, Dr. Ong Tze San for sharing

her knowledge and expertise in this field. This, I believe will guide me throughout my present

and future interests in research.

REFERENCES

Bursa Malaysia. (2016). TH Plantations Berhad [S] (5112). Retrieved 7 December, 2016, from http://www.bursamalaysia.com/market/listed-companies/list-of-companies/plc-profile.html?stock_code=5112

Investing. (2016). TH Plantations Bhd (THPB). Retrieved 5 December, 2016, from http://www.investing.com/equities/th-plantations-bhd-ratios

Investopedia. (2016). Terms. Retrieved 6 December, 2016, from http://www.investopedia.com/

TH Plantations. (2015). Cultivating Growth: Annual Report 2014. Kuala Lumpur: Aliatun Binti Mahmud (LS0008841) & Wan Nurul Hidayah Binti Wan Yusoff (LS0008555).

TH Plantations. (2016). Together for a Better Tomorrow: Annual Report 2015. Kuala Lumpur: Aliatun Binti Mahmud (LS0008841) & Wan Nurul Hidayah Binti Wan Yusoff (LS0008555).

Vijay V, Pimm SL, Jenkins CN, Smith SJ. (2016). The Impacts of Oil Palm on Recent Deforestation and Biodiversity Loss. PLoS ONE, 11(7), 1-19.


APPENDICES

Appendix 1


Appendix 2


Appendix 3


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th plantations bhd. 2014/2015 financial analysis

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