Investment Highlights

• We are downgrading TSH Resources to SELL from HOLD with a higher fair value of RM1.06/share vs. RM0.88/share previously. We believe that the rise in TSH Resources’ share price has already priced in the improvement in CPO prices.

• Our fair value for TSH implies an FY20F PE of 25x vs. 22x previously. We have raised TSH’s FY20F net profit by 6% to account for a higher average CPO price assumption of RM2,200/tonne vs. RM2,100/tonne originally.

• TSH’s 9MFY19 reported results were within consensus estimates and our expectations. Included in TSH’s reported net profit in 9MFY19 was an insurance claim of RM41.6mil. This was partly offset by write-off and impairment of fixed assets and inventories amounting to RM27.4mil in total. In TSH’s 3QFY19 reported net profit, the insurance claim was RM15.3mil while the impairment loss on inventories was RM6.4mil.

• The group’s gross profit slid by 22.1% YoY to RM183.7mil in 9MFY19 due to rising production costs and weak CPO prices. Average CPO price fell by 13.6% to RM1,906/tonne in 9MFY19 from RM2,205/tonne in 9MFY18.

• Also, TSH’s FFB production growth was unexciting at 0.2% YoY in 9MFY19. TSH’s FFB production in Indonesia improved by a small 1.7% YoY in 9MFY19 while in Malaysia, FFB output slipped by 10.7%. Indonesia accounted for 89.1% of TSH’s FFB production in 9MFY19 while Malaysia made up the balance 10.9%.

• We attribute the small YoY increase in TSH’s FFB production in 9MFY19 to tree stress after bumper harvests in the past two years. TSH’s FFB output grew by a blistering 19.2% in FY17 and 20.8% in FY18.

• There were three factors which cushioned the fall in TSH’s palm earnings in 9MFY19. First, insurance claims for a fire at Ekowood’s plant in Gopeng. Second, the rise in the share of profits in TSH/Wilmar refinery to RM18.5mil in 9MFY19 from RM3.0mil in 9MFY18. Third, the 22.5% YoY increase in the EBIT of the “Others” unit (mainly cocoa activities) in 9MFY19.

• On a quarterly basis, TSH’s gross profit improved by 10.4% to RM64.2mil in 3QFY19 driven by a higher CPO production. Average CPO price was RM1,905/tonne in 3QFY19 against RM1,901/tonne in 2QFY19. FFB production expanded by 23.2% QoQ in 3QFY19.

• EBIT of the “Others” division slid by 29.8% QoQ to RM6.5mil in 3QFY19. EBIT margin dropped to 21.7% in 3QFY19 from 31.7% in 2QFY19.

Source: AmInvest Research - 26 Nov 2019