Investment Highlights

• We are upgrading TSH Resources to HOLD from SELL as its share price is close to our fair value of RM0.88/share. Our fair value for TSH is based on an FY20F PE of 22x.

• We have reduced TSH’s FY19E FFB production growth to 7% from 12% due to poor FFB yields. We have assumed an average group FFB yield of 24.0 tonnes/ha in FY19E compared with 25.3 tonnes/ha in FY18. TSH’s FFB yield in Indonesia is expected to ease in FY19E after two years of high productivity. TSH’s group FFB yields were 24.2 tonnes/ha in FY17 and 25.3 tonnes/ha in FY18.

• Even though TSH’s FFB output is expected to pick up in 2HFY19, we reckon that on a full-year basis, our original assumption of 12% would still be too aggressive. TSH’s FFB output growth was a mere 1.0% YoY in 1HFY19.

• In spite of our downward revision in TSH’s FFB production growth, the group’s FY19E net profit is unchanged as we have increased the contribution of the “Others” division (mainly cocoa and biomass activities). EBIT of the “Others” division is expected to grow by 10.4% in FY19E as cocoa prices are still positive.

• We gather that fortunately, there have not been fires at TSH’s oil palm estates in Sumatra and Kalimantan. Also, there are no hotspots at TSH’s oil palm estates in Indonesia currently. In addition, the weather has been dry since July 2019. This means that rainfall has not been optimum for three consecutive months. Indonesia accounts for more than 80% of TSH’s FFB production.

• Overall, we forecast TSH’s FY19E core net profit (ex-forex changes) to decline by 11.4% in FY19E dragged by weak palm product prices and rising production costs. The fall in TSH’s FY19E net profit is not expected to be as severe as other plantation companies. This is due to improved performance of the palm refinery in Kunak and insurance claims of RM26.2mil. The insurance claims came about due to a fire, which took place at Ekowood’s plant in Gopeng in February 2019.

• We have assumed an average CPO price of RM2,000/tonne for TSH in FY19E vs. RM2,086/tonne achieved in FY18. We reckon that TSH’s ex-mill production cost in Indonesia would rise to RM1,700/tonne in FY19E from RM1,670/tonne in FY18 due to higher costs of fertiliser and wages.

• We forecast TSH’s capex to fall to RM130mil in FY19E from RM151.1mil in FY18 as new plantings of oil palm in Indonesia decline. New plantings of oil palm in Indonesia are estimated to be less than 1,000ha in FY19E. We estimate TSH’s net gearing to be 96.7% as at end-FY19E compared with 98.2% as at end-FY18.

Source: AmInvest Research - 19 Sept 2019