Investment Highlights

• We are upgrading TSH Resources from HOLD to BUY with a higher fair value of RM1.48/share vs. RM1.35/share previously. Our fair value for TSH is based on a higher FY19F PE of 22x compared with 20x originally.

• We have raised our PE assumption for TSH as we think that plantation stocks would be re-rated if CPO prices recover in 2Q2019.

• We like TSH for its young oil palm trees in Indonesia. Indonesia accounts for more than half of TSH’s earnings and 85% of group FFB production.

• Average age of TSH’s oil palm trees is seven years old in Indonesia. About 29.1% of the group’s oil palm trees in Indonesia are between the prime age of nine and 15 years old while another 33% are from four to eight years old. An additional 30.5% of TSH’s oil palm trees in Indonesia are less than three years old. The balance 7.5% of the planted areas are more than 16 years old.

• We have assumed that TSH’s FFB production would improve by 6.9% in FY19F compared with 14.7% in FY18E. Kalimantan is expected to drive TSH’s FFB output growth in FY19F. East and Central Kalimantan are envisaged to account for 60% of group FFB production in FY19F while Sumatra is estimated to make up another 25%. TSH’s oil palm estates in Sabah are anticipated to account for the balance 15% of group FFB production in FY19F.

• We estimate TSH’s production cost (ex-mill) in Indonesia to be RM1,750/tonne in FY19F vs. RM1,700/tonne in FY18E. The increase in TSH’s production cost per tonne is expected to be driven by higher costs of wages and fertiliser costs. We believe that minimum wage in Indonesia would increase between 5% and 10% in FY19F compared with 8% to 9% in FY18E.

• We believe that TSH’s capex would be flat at RM140mil in FY19F. We reckon that new plantings of oil palm would be minimal in Indonesia in FY19F. Getting approvals from the RSPO for new plantings is a slow process as the RSPO is short-handed. In addition, TSH is conserving cash to keep its net gearing ratio from rising further. TSH’s net gearing stood at 108.3% as at end-June 2018.

Source: AmInvest Research - 7 Sept 2018