Investment Highlights

• We are downgrading TSH Resources to SELL from HOLD with a higher fair value of RM0.80/share vs. RM0.66/share previously. Our fair value for TSH is based on a FY21F PE of 18x instead of 15x. We have raised our PE assumption for TSH as the group’s FFB production growth is more resilient than its peers. TSH has less exposure to Sabah, which appears to be harder hit to last year’s drought compared with other areas.

• We believe that TSH’s net profit would be weaker in 2QFY20 vs. 1QFY20 as CPO prices have plunged to about RM2,000/tonne to RM2,300/tonne currently from RM2,600/tonne to RM2,700/tonne in 1QFY20.

• Hence even though TSH’s 1QFY20 net profit appears to be robust, we are leaving our FY20F net profit forecast for TSH unchanged. Included in TSH’s 1QFY20 reported net profit was a forex loss of RM26.2mil (1QFY19: forex gain of RM4.0mil).

• TSH’s gross profit rose by 54.7% YoY to RM91.9mil in 1QFY20 largely underpinned by a 36.0% increase in average CPO price realised. TSH’s average CPO price realised rose to RM2,599/tonne in 1QFY20 from RM1,911/tonne in 1QFY19.

• The group’s FFB production growth was 1.6% YoY in 1QFY20. TSH’s Indonesia division recorded a 5.4% YoY increase in FFB output in 1QFY20 while in Malaysia, FFB production slid by 24.6%. Indonesia accounted for 90.4% of group FFB output in 1QFY20.

• Due to higher CPO prices, EBIT of the palm division surged by 218.6% to RM55.8mil in 1QFY20 from RM17.5mil in 1QFY19. EBIT margin was 25.2% in 1QFY20 vs. 9.7% in 1QFY19.

• EBIT of the “Others” division (biomass, cocoa and wood flooring) declined by 30.6% to RM6.8mil in 1QFY20 from RM9.8mil in 1QFY19. The YoY fall in the earnings of the “Others” unit in 1QFY20 was due to lower contribution from biomass as there was not enough feedstock. Recall that industry CPO production was weak in Sabah in 1QFY20 due to the lagged impact of the drought and haze in 3QFY19.

• Share of net profit in the TSH/Wilmar palm refinery shrank by 44.5% to RM2.2mil in 1QFY20 from RM4.0mil in 1QFY19. We reckon that this may be due to untimely purchases of feedstock.

• TSH’s net gearing rose to 101.2% as at end-March 2020 from 90.8% as at end-December 2019 as the MYR had depreciated against most foreign currencies. About 33.0% of TSH’s RM1.4bil gross borrowings were denominated in foreign currencies.

Source: AmInvest Research - 22 May 2020