Investment Highlights

• Maintain BUY on TSH Resources with a lower fair value of RM1.38/share (vs. RM1.48/share previously), which is based on an FY19F PE of 22x. TSH is currently trading at a FYE12/19F PE of 18.1x compared with IJM Plantations’ FYE3/20F PE of 19.7x.

• We are keeping TSH’s FY18E earnings forecast. However, we have reduced TSH’s FY19F net profit forecast by 6.9% to account for a lower plantation EBIT margin of 16% vs. 17% previously.

• We believe that TSH’s plantation EBIT margin in FY19F would be squeezed by higher costs of fertiliser, diesel and wages. Plantation production costs are expected to increase by more than 10% in FY19F.

• We have assumed that TSH’s FFB production would improve by 15% in FY18E compared with 19.2% in FY17. Indonesia accounts for more than 80% of TSH’s FFB production.

• In spite of TSH’s robust FFB production growth of 31.8% YoY in 1HFY18, we think that this may not be sustainable in 2HFY18. Hence, we are not revising our FY18F FFB output growth assumption of 15% for TSH.

• However, the group’s net profit in 2HFY18 may still be better than 1HFY18 as most of the manuring and fertilisation expenses are expected to be completed by 3QFY18.

• We think that industry FFB production in Kalimantan would ease YoY in 3Q2018 or 4Q2018 as the oil palm trees take a rest after the robust productivity in 2Q2018.

• TSH’s strong FFB production of 40.4% YoY in 2QFY18 was mainly driven by its Central and East Kalimantan units. An industry player with operations in East Kalimantan said that palm production in the province was so high that palm refiners ran out of storage space. This contributed to the downward trend in CPO prices.

• We understand that the issue would be resolved when FFB production in East Kalimantan ease in September or October 2018.

• We estimate TSH’s production cost (ex-mill) to be RM1,800/tonne in Indonesia in FY19F compared with RM1,750/tonne in FY18E. Although TSH’s FFB production is envisaged to expand by 7% in FY19F, we believe that this would not generate enough economies of scale to reduce production costs on a per tonne basis.

Source: AmInvest Research - 8 Oct 2018