Investment Highlights

• We are downgrading TSH Resources to HOLD with a lower fair value of RM1.12/share (vs. RM1.15/share previously), which is based on an FY19F PE of 22x.

• We have reduced TSH's FY19F net profit by 3.9% to account for a lower operating profit margin for the palm division. We believe that rising production costs and weak CPO prices would squeeze the operating profit margin of the palm division. We have assumed a pre-tax profit margin of 12.5% for the palm division in FY19F compared with 13.5% originally.

• We think that TSH’s FFB production would grow at a slower rate of 8.8% in FY19F vs. a blistering 21% estimated for FY18E. We reckon that after two years of robust productivity, TSH’s oil palm trees in Kalimantan would take a breather. TSH recorded an FFB output growth of 19.2% in FY17 and an estimated 21% in FY18E.

• On a positive note, TSH’s FFB production in Sabah may recover in FY19F. However, the contribution is not expected to be significant as Sabah only accounts for 14% of TSH’s mature areas.

• After being affected by the lagged impact of the dry weather in the past two years, we understand that FFB yields in Sabah would improve in FY19F. TSH’s FFB production in Sabah is estimated to have inched up by 3% YoY in FY18E.

• TSH’s FFB production growth is expected to be driven by Indonesia. Indonesia is envisaged to account for almost 80% to 85% of the group’s annual FFB output. TSH has mature areas of about 25,000ha in Indonesia.

• We forecast TSH’s capex to decline from RM150mil to RM130mil in FY19F. The group is expected to carry out minimal new plantings to conserve cash and keep its net gearing from rising. In spite of the high net gearing of 109.8%, TSH’s interest coverage is expected to be 4.8x in FY19F.

• TSH has gross borrowings of about RM1.48bil. About 28% of the gross borrowings are denominated in foreign currencies. The balance 72% of the borrowings are denominated in MYR.

Source: AmInvest Research - 7 Feb 2019