Investment Highlights

• Maintain BUY on TSH Resources with an unchanged fair value of RM1.38/share. Our fair value is based on an FY19F PE of 22x.

• Recently, we visited TSH’s cocoa processing plant in Klang. The plant processes low grade cocoa beans into cocoa butter. TSH’s cocoa butter products are sold in the low-end segment.

• The cocoa division is expected to account for 20% of TSH’s pre-tax profit in FY18E vs. 4% in FY17. We believe that earnings of TSH’s cocoa unit would sustain until 1HFY19 as selling prices of cocoa butter have been holding up.

• TSH’s cocoa butter products are exported mainly to Europe and the USA. Demand for cocoa butter comes from global confectionery companies such as Hershey’s and Cadbury. The raw material i.e. cocoa beans are imported in USD from Indonesia and African countries such as Ivory Coast and Ghana.

• The production capacity of TSH’s cocoa processing plant is about 10,000 tonnes per year. The biggest cocoa processor in Malaysia is Guan Chong Bhd, which has an annual production capacity of about 250,000 tonnes.

• We understand that the cocoa processing market is doing well this year as prices of cocoa butter have been going up. Using the price of Cocoa Merchants Natural African type cocoa butter as a gauge, the price of cocoa butter has climbed by 33.8% from an average of US$5,158/tonne in 9M2017 to US$6,901/tonne in 9M2018.

• On the other hand, the price of cocoa beans is still manageable. Using the price of Cocoa Merchants Ivory Coast Grade 1 cocoa bean as a gauge, the price of cocoa bean has risen by only 15.3% from US$2,273/tonne in 9M2017 to US$2,621/tonne in 9M2018.

• Risk is the short cycle of the selling price of cocoa butter. We understand that the uptrend in the selling price of cocoa butter normally lasts for only six months.

• Also, cocoa butter prices are volatile. During a downtrend, selling prices of cocoa butter may fall below the cost of cocoa beans. The last two downturns in cocoa butter prices took place in years 2014 and 2017.

Source: AmInvest Research - 29 Oct 2018