Investment Highlights

• Maintain BUY on TSH Resources with a lower fair value of RM1.15/share based on an FY19F PE of 22x.

• TSH’s 3QFY18 performance was surprisingly decent. EBIT of the palm division improved by 2.1% QoQ in spite of the 10.8% drop in CPO price.

• We believe that the positive earnings were underpinned by a 13.7% QoQ increase in CPO production in Indonesia and a reduction in operating costs in 3QFY18. EBIT of TSH’s palm division inched up by 2.1% from RM38.8mil in 2QFY18 to RM39.6mil in 3QFY18.

• The “others” division also performed well in 9MFY18 on the back of high cocoa butter selling prices. EBIT of the “others” division jumped by 80.8% YoY to RM20.8mil in 9MFY18.

• In spite of this, we have reduced TSH’s FY18E net profit by 8% to account for a lower CPO price of RM2,100/tonne vs. RM2,300/tonne previously. We have also cut TSH’s FY19F net profit by 21.3% to account for a weaker plantation EBIT margin and lower CPO price assumption of RM2,300/tonne vs. RM2,500/tonne previously.

• Average CPO price realised shrank by 10.8% from RM2,283/tonne in 2QFY18 to RM2,037/tonne in 3QFY18. On a yearly basis, average CPO price realised fell 19.1% from RM2,727/tonne in 9MFY17 to RM2,205/tonne in 9MFY18.

• TSH’s average CPO price is lower than some of its peers as its plantation operations are mainly in Indonesia. CPO prices in Indonesia are lower than Malaysia due to higher infrastructure and demurrage costs.

• TSH’s FFB production was 3.3% higher in 3QFY18 vs. 2QFY18. However, CPO production rose by a stronger 13.7% QoQ in 3QFY18 due to a surge in FFB purchases. FFB processed climbed by 34.8% QoQ in Indonesia in 3QFY18.

• Comparing 9MFY18 against 9MFY17, TSH’s FFB production rose by 26.3%. The group’s FFB output in Indonesia climbed by 31.1% YoY in 9MFY18 while in Malaysia, FFB production inched down by 1.2%. Indonesia accounted for 88% of group FFB output in 9MFY18.

• TSH's effective tax rate was 42.6% in 9MFY18 vs. 23.7% in 9MFY17. The higher effective tax rate can be attributed to the under-provisioning of prior years. Comparing 3QFY18 against 2QFY18, effective tax rate declined from 51.5% to 45.9%. TSH’s net gearing stood at 109.8% as at endSeptember vs. 108.3% as at end-June. About 27.9% of the group’s borrowings were denominated in foreign currencies as at end-September 2018.

Source: AmInvest Research - 30 Nov 2018