Investment Highlights

• We maintain SELL on TSH Resources with an unchanged fair value of RM1.06/share. Our fair value for TSH is based on a FY20F PE of 25x.

• TSH’s FY19 core net profit of RM39.2mil (ex-forex gain of RM4.8mil) results were 11.4% below our earnings forecast but within consensus estimates. TSH has declared a gross DPS of 1 sen for FY19.

• TSH’s core net profit was lower in 4QFY19 compared with 3QFY19 due to weak earnings from the associates and the “others” division. Share of earnings in the TSH/Wilmar palm refinery swung to a negative RM1.3mil in 4QFY19 from RM6.8mil in 3QFY19. TSH also recorded a fair value loss of RM4.7mil on commodity futures contracts in 4QFY19.

• Disregarding the associates, TSH’s gross profit rose by 34.1% QoQ to RM34.5mil in 4QFY19 on the back of higher palm product prices.

• TSH’s average CPO price realised climbed by 18.1% to RM2,250/tonne in 4QFY19 from RM1,905/tonne in 3QFY19. TSH’s FFB production slid by 2.8% QoQ in 4QFY19.

• The “Others” division (mainly cocoa and biomass activities) recorded a smaller EBIT of RM4.5mil in 4QFY19 vs. RM6.5mil in 3QFY19. EBIT margin eased to 15.8% in 4QFY19 from 21.7% in 3QFY19 due to higher operating expenses.

• Comparing FY19 against FY18, TSH’s core net profit (exforex changes) plunged by 21.9% to RM39.2mil from RM50.2mil dragged by weak palm product prices. CPO prices started recovering only in 4QFY19.

• Included in TSH’s FY19 core net profit was insurance claims of RM41.7mil and write-offs of assets of RM25.5mil in respect of a fire at the wood flooring plant in Gopeng in February 2019.

• TSH’s average CPO price was RM1,995/tonne in FY19 vs. RM2,086/tonne in FY18. FFB production growth was 4.2% in FY19.

• Share of net profit in the TSH/Wilmar palm refinery climbed to RM17.2mil in FY19 from RM5.0mil in FY18 underpinned by timely purchases of feedstock in 9MFY19.

• TSH’s net gearing stood at 90.8% as at end-Dec 2019 vs. 98.2% as at end-Dec 2018. TSH reduced its capex by RM46.6mil in FY19 and repaid about RM12.4mil worth of borrowings (after deducting drawdowns). About 30.7% of TSH’s gross borrowings of RM1.4bil were denominated in foreign currencies as at end-Dec 2019.

Source: AmInvest Research - 28 Feb 2020