Investment Highlights

• We are upgrading TSH Resources to HOLD from SELL with a lower fair value of RM0.66/share (vs. RM0.79/share previously). Our fair value for TSH is based on an FY21F PE of 15x instead of 18x previously. We have lowered our PE assumption for TSH due to the group’s high net gearing. Although TSH’s net gearing has declined to 90.8% in FY19, it is still one of the highest among the companies in our coverage.

• We do not expect TSH to be significantly affected by the suspension of plantation operations in Sabah as the group’s exposure is small. About 90% of TSH’s FFB production comes from Indonesia.

• We have assumed TSH’s FFB production growth to be 5.0% in FY20F vs. 4.2% in FY19. The FY20F growth in FFB production is expected to be driven by an increase in mature areas of 4,500ha in Indonesia.

• We reckon that TSH’s group FFB yield would be slightly lower at 21.0 tonnes/ha in FY20F vs. 22 tonnes/ha in FY19. TSH’s Indonesia unit recorded an FFB yield of 24.3 tonnes/ha in FY19 while Malaysia achieved an FFB yield of 19.7 tonnes/ha.

• We believe that TSH’s ex-mill production cost would be RM1,500/tonne (FY19: RM1,466/tonne) in Malaysia and RM1,750/tonne (FY19: RM1,723/tonne) in Indonesia in FY20F.

• We attribute the rise in production cost per tonne in FY20F to higher costs of wages and inflationary pressures. On a positive note, fertiliser costs are expected to be flat in FY20F. Average minimum wage in Indonesia is envisaged to increase by 8.5% in FY20F.

• We expect the “Others” division (biomass, wood flooring and cocoa activities) to record a lower EBIT of RM23.8mil in FY20F vs. RM30.0mil in FY19.

• We think that cocoa EBIT may be affected by lower selling prices and sales volume in FY20F due to the Covid-19 outbreak. TSH’s cocoa plant in Klang has a processing capacity of 10,000 tonnes per year.

• We forecast TSH’s net gearing to inch down to 89.7% in FY20F from 90.8% in FY19. We think that TSH’s capex would be RM105mil in FY20F (FY19: RM102.6mil) consisting mainly of maintenance of roads and palm oil mills and replanting of ageing oil palm trees.

• TSH’s net gearing improved to 90.8% in FY19 from 98.2% in FY18 due to a decline in capex. TSH’s capex declined by 32.1% to RM102.6mil in FY19 from RM151.1mil in FY18.

Source: AmInvest Research - 6 Apr 2020