Investment Highlights

• We are downgrading TSH Resources to SELL from HOLD due to expensive valuations. TSH’s FY19F PE is 25.9x after the downward revision in its earnings. Our fair value of RM0.93/share (vs. RM1.12/share previously) for TSH is based on an unchanged FY19F PE of 22x.

• We have reduced TSH’s FY19F net profit by 16.7% to account for weaker cocoa earnings and a lower palm EBIT margin of 14.5% vs. 16.0% previously. We believe that TSH’s palm EBIT margin would not be as high as expected due to increased fertiliser, transportation and wages costs.

• Although TSH’s pre-tax profit is only expected to rise by 4.6% in FY19F, core net profit (ex-forex changes) is envisaged to improve by a stronger 17.8%. This is because we have assumed that TSH’s effective tax rate would normalise to 25% in FY19F compared with 36.6% in FY18.

• We have assumed an FFB production growth of 10.7% for TSH in FY19F compared with 20.8% in FY18. We expect a slower rate of increase in TSH’s FFB production in FY19F after the blistering 19.2% growth in FY17 and 20.8% rise in FY18.

• We believe that Indonesia will continue to underpin TSH’s FFB production. Indonesia is expected to account for almost 80% of group FFB output. TSH has 5,048ha of mature areas in Indonesia vs. 30,023ha in Malaysia. We understand that there are no issues with the weather conditions in TSH’s oil palm estates in Kalimantan and Tawau. So far, rainfall has been adequate.

• We forecast TSH’s “others” division (cocoa, wood-flooring and biomass activities) to record a lower EBIT of RM23.0mil in FY19F compared with RM29.7mil in FY18 due to weaker cocoa butter selling prices. So far this year, selling prices of cocoa butter have been lower than last year’s due to ample global supplies of cocoa.

• According to Bloomberg, the price of cocoa butter (exNetherlands) has softened by 5.4% to US$5,696/tonne so far this year from US$6,023/tonne in 1QFY18. The “others” division’s EBIT surged by 312.0% to RM29.7mil in FY18 on the back of higher cocoa butter selling prices.

• We forecast TSH’s net gearing to ease to 96.7% as at endFY19F compared with 98.4% as at end-FY18. We expect the group to continue reducing capex in FY19F to generate free cash flows. We have assumed TSH’s capex to be RM130mil in FY19F against RM163.2mil in FY18.

Source: AmInvest Research - 21 Mar 2019