Investment Highlights

• We are upgrading TSH Resources to HOLD from SELL with a higher fair value of RM0.95/share (vs. RM0.80/share originally). We have raised our FY21F PE assumption for TSH to 22x from 18x as prospects for CPO prices are not as bleak as before. Although palm stockpiles may be high in 2H2020, palm demand is also recovering.

• We have assumed that TSH’s FFB production would grow by 5.0% in FY20E (5MFY20: 3.3%, FY19: 4.2%) on the back of an increase in mature areas of 2,000ha.

• We think that TSH’s FFB yield would remain flat at 23.6 tonnes/ha in FY20E vs. 23.7 tonnes/ha in FY19. Also, we expect TSH’s FFB yield to stagnate in FY20E due to the lagged impact of the haze and drought weather, which took place in 3Q2019.

• TSH is not envisaged to be affected by the lagged impact of the drought as much as the other planters due to its small exposure to Sabah.

• Based on production data, it appears that Sabah was more affected by 2019’s drought compared with other areas such as Northeast Kalimantan. Sabah accounts for about 10% of TSH’s group FFB production while Indonesia makes up the larger 90%.

• We understand that there are no issues with weather conditions currently. There is sufficient rainfall in TSH’s oil palm estates in Tawau, Sumatra, Central and Northeast Kalimantan. Generally, the optimum amount of rainfall for oil palm trees is about 150mm to 200mm per month.

• We think that TSH’s ex-mill CPO production cost would rise to RM1,500/tonne in Sabah and RM1,750/tonne in Indonesia in FY20E. The group’s ex-mill production costs were RM1,466/tonne in Sabah and RM1,723/tonne in Indonesia in FY19.

• We attribute the increase in CPO production costs to higher minimum wages in Malaysia and Indonesia. Average minimum wage in most provinces in Indonesia is anticipated to rise by 8.5% in FY20E. Fertiliser costs are expected to inch up by 3% to 4% in FY20E.

• We forecast EBIT of the “Others” division (biomass, wood flooring and cocoa) to decline by 9.0% to RM23.8mil in FY20E due to weaker earnings from the wood flooring and cocoa divisions. We believe that both segments would suffer from a fall in demand resulting from the Covid-19 outbreak. More than half of the earnings in the “Others” division came from cocoa and biomass in FY19.

Source: AmInvest Research - 24 Jun 2020