Investment Highlights

• We are keeping our SELL recommendation on TSH Resources with an unchanged fair value of RM0.88/share. Our fair value for TSH is based on an FY20F PE of 22x. In our earnings forecast for TSH, we have assumed average CPO prices of RM2,000/tonne for FY19F (FY18: RM2,086/tonne) and RM2,100/tonne for FY20F.

• Like its peers in the industry, we believe that TSH would be affected by weak palm product prices in FY19F. Unlike its peers however, the fall in TSH’s FY19F net profit is not expected to be as severe due to the group’s lower effective tax rate and insurance claims for a fire at Ekowood’s plant in Gopeng.

• We forecast TSH’s pre-tax profit (ex-forex) to decline by 21.3% to RM64.3mil in FY19F as increased production costs and weak CPO prices eat into operating profit margins. Core net profit (ex-forex) is envisaged to fall by a smaller 11.5% in FY19F.

• Excluding insurance claims of more than RM20mil, Ekowood is expected to record a small loss of RM3mil to RM4mil in FY19F. Demand for wood flooring products is unexciting in Europe. About 50% to 60% of Ekowood’s products are exported to Europe while the balance 40% are sold to other countries such as Australia, China, Malaysia and the USA.

• In spite of Ekowood’s losses, core earnings of the “others” division are envisaged to be unchanged at RM27mil in FY19F driven mainly by the cocoa segment. Outlook of the cocoa unit is expected to remain positive in FY19F as selling prices of cocoa butter are still high. The “others” division consists of earnings from the biomass, cocoa and Ekowood units. The” others” division accounts for about 20% of TSH’s pre-tax profit while plantation makes up the balance 80%.

• TSH’s ex-mill production costs are estimated to be RM1,450/tonne in Sabah and RM1,750/tonne in Indonesia in FY19F. The group’s ex-mill production costs were RM1,416/tonne in Sabah and RM1,673/tonne in Indonesia in FY18. The increase in production costs is due to higher costs of fertiliser and wages.

• TSH’s FFB production is anticipated to improve by 12% in FY19F (FY18: 20.8%). FFB output in Indonesia is estimated to rise by 14% while in Malaysia, FFB production is expected to be flat. Indonesia accounts for about 85% of TSH’s FFB production. We understand that currently, there are no issues with weather at TSH’s oil palm estates in Malaysia and Indonesia.

Source: AmInvest Research - 18 Jun 2019