Investment Highlights

• We are maintaining our SELL recommendation on TSH Resources with an unchanged fair value of RM0.88/share. Our fair value for TSH implies an FY20F PE of 22x.

• TSH’s 1HFY19 results were within our expectations but 15% short of consensus estimates.

• TSH’s net profit (ex-forex gain of RM0.6mil) fell by 22.2% YoY to RM19.0mil in 1HFY19. Like the other plantation companies, TSH was hit by weak CPO prices in 1HFY19.

• Excluding the insurance claims, we believe that TSH’s earnings would have been significantly lower in 1HFY19. TSH recognised insurance claims of RM26.2mil in 9MFY19, which were partly offset by asset write-offs of RM20.7mil. TSH claimed insurance for a fire at Ekowood’s plant. The fire took place in February 2019.

• Average CPO price realised was RM1,906/tonne in 1HFY19 compared with RM2,299/tonne in 1HFY18. As a result, plantation EBIT slid by 52.6% to RM31.8mil in 1HFY19 from RM67.0mil in 1HFY18. Plantation EBIT margin fell to 9.4% in 1HFY19 from 17.0% in 1HFY18.

• TSH’s FFB production growth was a small 1.0% YoY in 1HFY19. FFB output in Indonesia improved by 2.8% YoY in 1HFY19 while in Malaysia, FFB production fell by 10.5%. Comparing 2QFY19 against 2QFY18, TSH’s FFB output in Indonesia slipped 8.5%.

• On a quarterly basis, TSH’s gross profit edged down by 2.1% to RM58.2mil in 2QFY19. This was due to an 18.7% QoQ drop in palm EBIT and 5.7% QoQ decline in the EBIT of the “others” division in 2QFY19.

• In spite of these, TSH’s net profit inched down by 1.9% only QoQ in 2QFY19 as share of net profits in the TSH/Wilmar palm refinery in Kunak surged by 91.1% to RM7.7mil. Comparing 1HFY19 against 1HFY18, TSH’s share of profits in the palm refinery climbed to RM11.7mil from RM2.5mil.

• EBIT of the “others” division (mainly cocoa and biomass) improved to RM19.0mil in 1HFY19 from RM10.8mil in 1HFY18 as cocoa selling prices were still resilient. EBIT margin of the division was 34.1% in 1HFY19 vs. 16.7% in 1HFY18.

• TSH’s net gearing stood at 98.1% as at end-June 2019 vs. 97.9% as at end-March 2019. About 28.1% of the group’s borrowings were denominated in foreign currencies as at end-June 2019.

Source: AmInvest Research - 23 Aug 2019