Investment Highlights

• We are keeping our HOLD recommendation on TSH Resources with an unchanged fair value of RM1.12/share. Our fair value of RM1.12/share is based on a FY19F PE of 22x.

• TSH’s FY18 core net profit was 17% below our earnings forecast and 13.5% short of consensus estimates as earnings in 4QFY18 tumbled.

• After a decent 3Q, TSH recorded a 56.0% decline in core net profit (ex-forex gain of RM2.3mil) in 4QFY18 due to a weaker CPO price and fall in FFB production.

• Average CPO price slid by 12.6% to RM1,780/tonne in 4QFY18 from RM2,037/tonne in 3QFY18. FFB production was 17.7% QoQ lower in 4QFY18. We believe that TSH’s FFB production in Indonesia peaked in 3QFY18.

• EBIT of the “Others” division (mainly cocoa processing) dropped by 11.9% QoQ to RM8.8mil in 4QFY18, dragged by a squeeze in EBIT margin. EBIT margin of the unit was 23.3% in 4QFY18 vs. 29.5% in 3QFY18.

• Comparing FY18 against FY17, TSH’s core net profit (exforex loss of RM9.7mil) fell by 37.8%, weighed down by a drop in palm product prices and higher production costs.

• Average CPO price shrank by 22.8% to RM2,086/tonne in FY18 from RM2,701/tonne in FY17. We think that TSH’s production cost (ex-mill) in Indonesia rose by RM50/tonne to RM1,742/tonne in FY18 from RM1,692/tonne in FY17.

• On a positive note, TSH’s FFB production growth was a strong 20.8% in FY18. TSH’s FFB output in Indonesia grew by 24.6% in FY18 while in Sabah, FFB production was flat. Indonesia accounted for 87% of group FFB production in FY18.

• TSH's effective tax rate increased to 36.6% in FY18 from 26.5% in FY17 due to under-provisioning in prior years. We have assumed that the group’s effective tax rate would normalise to 25% in FY19F.

• TSH’s net gearing stood at 98.4% as at end-December 2018 compared with 109.8% as at end-September. About 26.4% of the group’s borrowings were denominated in foreign currencies as at end-December 2018.

Source: AmInvest Research - 28 Feb 2019