Investment Highlights

• We are keeping our SELL recommendation on TSH Resources with a lower fair value of RM0.88/share (vs. RM0.93/share previously). Our fair value for TSH is based on an unchanged FY20F PE of 22x.

• We have reduced TSH’s FY20F net profit forecast by 30.2% to account for a weaker CPO price of RM2,100/tonne vs. RM2,350/tonne previously. TSH’s average CPO price is lower than its peers due to its bigger exposure to Indonesia. Industry CPO price in Indonesia is usually lower than Malaysia’s due to the former’s higher transportation and logistics costs.

• We have also revised TSH’s FY19F net profit downwards by 24.0% to account for a lower palm EBIT margin and CPO price assumption of RM2,000/tonne vs. RM2,300/tonne originally.

• TSH’s 1QFY19 core net profit (ex-forex gain of RM4.0mil) was 31.9% below our earnings forecast and 40.9% short of consensus estimates. The weak core results were due to soft palm product prices and plantation EBIT margin.

• However unlike other plantation companies, TSH’s core net profit climbed by 46.1% YoY to RM9.6mil in 1QFY19 dragged by a fall in the effective tax rate. TSH’s effective tax rate declined to 17.2% in 1QFY19 from 34.3% in 1QFY18 due to the reversal of prior years’ overprovisioning. TSH’s gross profit shrank by 25.8% YoY to RM59.4mil in 1QFY19 in line with the fall in palm product prices.

• Although TSH recorded a 220.6% YoY surge in other operating income in 1QFY19, this was partly offset by write-off of assets of RM15.6mil. The assets were writtenoff as they were damaged in a fire at Ekowood’s plant at Gopeng in February 2017. We believe that the YoY increase in other operating income in 1QFY19 included insurance claims of RM23.7mil.

• EBIT margin of the plantation division slid to 9.7% in 1QFY19 from 14.5% in 1QFY18 dragged by higher costs and softer selling prices. TSH’s average CPO price realised shrank by 17.5% to RM1,911/tonne in 1QFY19 from RM2,316/tonne in 1QFY18.

• FFB production rose by 12.9% YoY in 1QFY19. About 87% of TSH’s FFB output came from Indonesia in 1QFY19. TSH’s FFB production in Sabah fell by 9.8% YoY in 1QFY19. In Indonesia, TSH’s FFB output grew by 17.2% YoY in 1QFY19. The group’s FFB production in Indonesia surged by 23.0% in FY17 and 25.0% in FY18.

• TSH’s net gearing stood at 97.9% as at end-March 2019 compared with 98.4% as at end-December 2018. About 26.6% of the group’s borrowings were denominated in foreign currencies as at end-March 2019.

Source: AmInvest Research - 28 May 2019