Investment Highlights

• We upgrade TSH Resources to BUY from HOLD with a higher fair value of RM1.21/share (vs. RM0.95/share previously). We have raised TSH’s FY21F EPS by 10.4% to account for a higher share of net profit in associates and palm EBIT margin. Our fair value for TSH is based on an FY21F PE of 25x. We have also raised TSH’s FY20E net profit by 10.8% to account for higher other operating income and share of net profit in associates.
• TSH’s 1HFY20 core net profit of RM41.6mil (ex-forex loss of RM19.5mil) exceeded our estimates but was within consensus. The discrepancies between TSH’s results and our forecast were due to a higher-than-expected share of net profit in associate (TSH/Wilmar palm refinery in Kunak) and insurance claims of RM13.1mil.
• Offsetting the RM13.1mil insurance claims was a write-off of inventories of RM10.7mil. We have raised TSH’s FY20E net profit by 10.8% to account for a higher share of net profit in associates and the insurance claims.
• TSH’s core net profit surged by 119.3% YoY to RM41.6mil in 1HFY20 on the back of higher CPO prices. Average CPO price realised increased by 23.3% to RM2,350/tonne in 1HFY20 from RM1,906/tonne in 1HFY19.
• FFB production grew by 5.2% YoY in 1HFY20. TSH’s FFB output in Indonesia improved by 6.7% YoY in 1HFY20 while in Malaysia, FFB production inched down by 5.3%.
• Comparing 2QFY20 against 1QFY20, TSH’s core net profit (ex-forex gain of RM6.7mil) fell by 54.0% to RM13.1mil dragged by a decline in CPO prices. Palm EBIT plunged by 65.2% to RM19.4mil in 2QFY20 from RM55.8mil in 1QFY20. Average CPO price declined by 19.2% to RM2,099/tonne in 2QFY20 from RM2,599/tonne in 1QFY20. On a positive note, FFB production rose by 5.5% QoQ in 2QFY20.
• TSH’s share of net profit in the TSH/Wilmar palm refinery expanded by 262.3% QoQ to RM8.1mil in 2QFY20 on timely purchases of feedstock. Comparing 1HFY20 against 1HFY19 however, share of net profit shrank by 11.9% to RM10.3mil.
• TSH’s net gearing declined to 83.4% as at end-June from 101.2% as at end-March 2020. TSH’s net gearing fell in 2QFY20 due to smaller negative foreign translation reserves. Foreign translation reserves narrowed from a negative RM375.9mil as at end-March to a negative RM166.7mil as at end-June 2020 as forex gains were transferred into the account.

Source: AmInvest Research - 21 Aug 2020